Inconsistencies in the Law of Demand and Supply

ECONONE K33! April 11, 2012! INTRODUCTION

! !

! !

! !

! !

! !

! !

! Chiang, Archie Del Rosario, Tara Margarita

demanded -- negative because when price increases, demand decreases, and when the price decreases, the quantity demanded increases. This law states that when the price of the product increases, the quantity demand for that price decreases. A simple explanation for this would obviously mean that the demand for this particular product goes down because people, or the consumers, do not want to go along with this increase in the products price. This relationship between market price and quantity demanded for a product is said to be the most important relationship in individual markets.

The quantity demand of a good is the amount that consumers plan on buying this

particular product in a particular amount of time. The law of demand states that other things remaining the same, the higher the price of a good, the smaller the quantity demanded. This shows a downward slope in the demand curve on a graph. There are effects to this decrease in quantity demanded caused by the price increase which are the substitution effect, and the income effect. The substitution effect basically states a substitute -- a higher relative price raises the opportunity cost of buying a particular good so that people can buy less of it. This is substituting the higher price as an anti-catalyst to the consumers buying of the product. The income effect on

the other hand means that when there is a price is increased, the amount of the product that people can buy decreases. This income effect will decrease the amount people will buy of the product since the price was raised.

In a household, the quantity demanded would be different. It would depend on many

different factors like: the price, the income available to the household, their amount of accumulated wealth, the prices of the other products available in the household, the households tastes and preferences and the households expectations for future income. Demand is one of the most important factors that have a relationship with the price of the product.

On the graph, for each quantity, the demand curve will have the highest price a person or

consumer is willing to pay for that quantity of product, and so the demand curve will have a downward slope as stated before -- in other words, they are negatively sloped. The demand schedule shoes the quantity of products the company has that are willing to be sold at different prices. It is basically a table that shows how much of a given product would be willing to be bought at different prices. This affects the demand curve. The intersects on the x-axis (quantity) and the y-axis (price) also give us more information about the quantity demanded. These intersects basically show all of the limitations for quantity -- as a results of time limitations and diminishing marginal utility -- and for price -- as a result of limited income. The law of demand is said to have the most important information for an individual market involving price and quantity demanded basically because it involves how much the consumers want the product, and how different factors change the increase or decrease in demand.

Just like the law of demand, the law of supply also shows the quantities that would be

sold at a certain price.""But supply doesnt work like demand. The supply relationship shows an upward slope wherein the demand slope shows a downward slope. This only means that if the price is higher, it will also have a higher supply quantity. Because there are more consumers buying, the producers tend to supply more at a higher price since selling a higher quantity at a higher price increases revenue faster.

There are limitations for the law of supply. These Limitations include the ability to move

stock, legislation restricting the quantity supplied, and external factors that inuence the industry.""Despite these limitations, the law of supply is indeed very important. There are limitations for the law of supply. These Limitations include the ability to move stock, legislation restricting the quantity supplied, and external factors that inuence the industry.""Despite these limitations, the law of supply is indeed very important.

Supplies have different responses to the changes in price of different goods, which

depends on their elasticity or inelasticity. Goods are elastic when a change in price""leads to a large change in the quantity supplied. On the other hand, the goods are inelastic when a change in price leads to no response to the quantity supplied. An example of an elastic good is chips or junk food. An example of an inelastic service is a doctors services. Producers would most likely want to supply more inelastic goods because they will be able to prot more off of them.

As the price of a good increases, the tendency is that the suppliers would want to supply

more of it. If the price of the good decreases, the tendency is that the the suppliers wont want to

supply much of it. The prot must be more than the opportunity cost of production for the producers to want to produce a good. If there is more prot, then surely, the producers would want to produce more of that good compared to the other goods that does not generate much prot. Usually, these are what entrepreneurs target. They usually enter business ventures with the intention of making prot. Prot occurs when the total revenue of the company is more than the total cost of production of the goods sold in the company. Customers must rst value the goods at the price being offered in order for them to buy that good. And in order for the customer to be willing to pay for that good which costs more than its production cost, the customer must value the good more that the other goods that could have been produced instead. So in reality, the suppliers prots is basically dependent on the customers demands and values. If the total revenue is less than the total cost of production, then they incur a loss.

Supply and demand is perhaps the most fundamental concepts of economics and it is the backbone of a market economy. The relationship between demand and supply provides te forces behind the allocation of resources in a market. Demand and supply should be able to allocate resources in a market economy in the most efcient way possible. The law of demand dictated that if all other factors are held constant and euqal, the higher price of the good, the less people would demand for that good. Just like the law of demand, the law of supply dictates the amount that will be sold at a certain price. This means that the higher the price, the higher the quantity supplied. However, the law of demand states that if the prices are too high, only very litle consumers will be able to purchase the goods and the demand will not be met by the supply. To fully meet the demand, the producers must price their good in a way that it will result to the required amount of sales while still getting enough prot for the company.

For example, assume that a laptop manufacturing company has a demand for new laptops. The company has invested in market research to produce the laptop that the comsumers woul want. They researched on what kind of laptop the market would most likely purchase. The company then produces 10,000 units of laptops and prices them at P50,000.00 each. The comsumers who nd the laptop to be valuable will be able to pay the P50,000.00 and about half of the 10,000 laptops would soon be sold. However, because of the high price, the sales begin to go down. The company then reaches market saturation wherein everyone who valued the laptop at P50,000.00 already has the laptop. Because the company loses money on unsold laptops, the reduce the price to P40,000.00m which makes consumers buy again. This porcess continues until the price will meet the demand and maximize the companys prots. When the supply and demand becomes balanced or qual, then the market is said to have reahced market equilibrium. At this point, the resources are used at their maximum efciency. Basically, the study of ecnomics is mostly a study on how a market enonomy can reach its equilibrium pointm, which then will bring the company maximum efciency. The law of supply and demand explains why people behave in certain ways within a market economy, and can even be used to predit behavior and economic outcomes. This is not only limited to the sale oof products. It can be used to ecplain alsmost any economic phenomenon such as a rise or drop in employment, increased or decreased enrollment in colleges and schools, or the expansion of tourism in one place. Therefore, the law of supply and demand is not only vital to the economical theory, it is also the foundation of econimics itself. ! Through our thorough research of the law of demand and the law of supply, we have

noticed that our ndings have had some inconsistencies with the applications of these two laws

in the actually market of the world today. One would be the question of a product that has too much demand on the market. The law of demand has many factors that affect the quantity demanded of the product, one being the household, or the companys competition. What happens if a company;s product has too much demand on the market? That would cause the demand curve to shift upwards. "Doesnt this contradict or question a part of the laws? They would also be the only suppliers for this product, or service. We have taken the opportunity of our country -the Philippines -- in its developing state now, to compare it with other countries that have many companies, and in our example we used the iPhone 4s as an example of a product which had too much demand on the market, question our ndings. This however, was not the only contradiction, or inconsistency, we have found in our research of the law of demand and supply. We noticed other inconsistencies in the laws, but later on did some further research and realized that this inconsistency did exist -- known as Giffen goods -- and is still being argued about if it really exists or not." !

iPHONE 4S
The iPhone was introduced to the market back in 2007. Since then, Apple has revolutionized the smartphone world. From its successful lines on iPods, they have released a breakthough phone which is much more powerful and smarter than all of its competitors at that time. The iPhone is at least 5 years more advanced than any of the smartphones today- says Steve Jobs at the iPhones launching at the MacWorld 2007. The iPhone has been continuously upgrading and now, it is down to its fourth generation of iPhones, the iPhone 4s.

The demand for the iPhone has never been this rampant.

On the rst weekend sale of the iPhone 4s, more than 4 million units were sold already! thats more than twice as good as last years iPhone 4 launch, which sold 1.7 million iphone 4 phones in the rst 3 days. Thats over 2 billion dollars in revenue for Apple Inc. within those 3 days of sale alone, and that doesnt include applications and accessories yet. That is an Apple record, a mobile phone record- according to Apple- and maybe even a consumer electronics record. ! ! This shocking amount of iPhone 4s phones sold has made me raise questions about the
!"#$%&%#'()&*$+,&"%%-.//00012-3#%*14+,/&5677/76/ 8-"+)(9:290(('();/

iPhone 4s. Why is the iPhone 4s sales so high? How do Apple Inc. keep up the supplies with the demands of the market? This is truly some questions that I want answered because I dont know how it is possible to sell 4 million iPhones in a span of just 3 days. And also, how is it possible to produce millions and millions of phones in a short amount of time just so the campany, Apple Inc., could be able to cope up wit hthe demands of its consumers.

The new iPhone 4s was launched last October, 2011. On the rst weekend alone, the

iPhone 4s sold like hot cakes - over 4 million iPhone 4s phones were sold. Why is the sales for the iPhone 4s so high? Is Apple Inc. taking over the smartphone industry? How did they do this?

Based on my research, the iPhone 4s had a lot of upgrades as compared to its little

brother, the iPhone 4. Apple Inc has updated a lot of the iPhone 4s features such as the new dual-core A5 chipset, an all new 8-megapixel camera, and ofcourse, Siri. These are the features

that people all over the world went crazy about. People everywhere were lining up in lines in front of the stores for more that 12 hours just so they could buy the Apple iPhone 4s for themselves. In Hong Kong and in China, people would buy the phones at prices that are twice as much as the original price set by Apple Inc. just so they could get it rst, and they dont just buy one for themselves, they woul buy about 5, 10, and een 100 iPhone 4s phones so that they could resell it and earn money. !

GIFFEN GOODS
! The question that I asked myself while researching on the law of demand and law of

supply was that these laws assume all products and goods to have almost the same context, in a way. Meaning, since according to the law of demand, when the price of a good goes down, demand goes up and vice versa. What if when the goods price goes down, the quantity demanded is not effect? What if when the goods price goes up, the demand goes up as well, or stays the same depending on the good? When goods are assumed to have the same context, this means that for example, if the price goes up, the demand goes down. What if the good is different, and has more of a demand on a regular basis? This is when I began to research this inconsistency, or this problem that dees the law of demand.

Denition
! A giffen good, is an inferior good, where there is always a more desirable substitute for

them. The reduction of the price of a giffen good only will allows you to be able to spend more for the alternative of that good. According to the demand curve, price and quantity demanded have a negative relationship -- meaning when the price decreases, the quantity demanded

increases. The giffen good however, shows a positive relationship. This relationship shows that when the price for the good increases, the quantity demanded increases as well, and therefore shoes an upward slope in the demand curve on the graph.

Example ! An inferior good that we would be buying on a regular basis, and can not stop buying

could be soap for example. A person will never buy soap only once, you will have to buy more soap once your previously owned bar has run out and you need it to take a shower. Now, for example, there are two brands of soap youd like to choose from, Safeguard and Dove. Its safe to say that Safeguard is a cheaper brand, since it is more family oriented, and their target market is anyone and everyone that needs a clean and good smelling soap. Dove on the other hand is more of a womens soap, and their target market is women, either middle aged or an older age, since their soap improves skin quality. For example, lets say Safeguard is 100 pesos and Dove is 150 pesos. You would spend 100 pesos, lets say per month, to buy Safeguard soap. If you buy Dove, it would be 150 pesos a month. Lets say, youve always wanted to buy Dove, for its creamy, silky feel to the skin. But suddenly, Safeguard drops their price by 50 pesos, making it

only 50 pesos. That 50 pesos you save if you were to buy Safeguard, could now be added to the 100 that you usually already use to buy the Safeguard, to but the Dove youve always wanted.

PROPOSED SOLUTIONS & THEORIES

iPhone 4s
So, how does Apple Inc. coupe up their supply with this huge demand from customers? Around late October, it has been reported that Apple Inc. is having a shortage in supplies of the iPhone 4s. Desire Athow, a writer in ITProPortal says: As expected, demand for the iPhone 4S has largely outstripped supply and while Apple already said that it has sold more than four million handsets in the rst 72 hours after its launch, it looks as if retailers are on the receiving end of an exceptionally high demand curve. Both!phones4u!and!Carphone Warehouse, two of the biggest resellers in the land have run out of stock online (although you might nd stock in their brick-and-mortar stores but that would be down to luck). Both urge their customers to sign up for updates to be notied when new stock becomes available.

Apple's own online store lists a one- to two-week delay in the delivery of all six stock-keeping units, which has been the case since the iPhone 4S was launched at the beginning of the month.

Apple Inc. is struggling to cope up with its huge demands with the iPhone 4s. The iPhone

4s pre-ordering reached over 200,000 orders within just the rst day of pre-selling the iPhones. They have been having a hard time to cope with the demand and supplies were running our fast. If you wanted to buy an iPhone 4s, youd have to wait for 1-2weeks because the shipments coming before that has already been sold to other people who ordered before you. However, in the late quarter of 2011, the sales and demand of the iPhone 4s has signicantly gone down. Apple has asked parts and components suppliers to delay their fourth-quarter 2011 shipments to the rst quarter of 2012 because the sales of the iPhone 4s has not been too strong as when it was rst introduced to the market.

Giffen goods
! The thing with giffen goods is that, their deance to the laws of demand and supply

dene it. So its safe to say that it is impossible to have a giffen good and not defy the law. The only way would be to make a giffen good, not a giffen good. This would have to happen in the beginning of the product development and releasing it into the market. The producers would have to ask themselves, How do I make this product, not an inferior product, in order to abide by the law of demand?. An inferior good has something that is a better alternative -- in our example, Dove was the better alternative for Safeguard, this new product cannot have a better alternative apart from itself. Going back to the denition of a giffen good, is what will keep it

from becoming a giffen good. How this new product will be marketed has to be done in such a way that it complies with the law again. This however, is why this question of law defying problems still remains, because it is not possible to change this factor of an inferior product in the economic society now, but it will only change in newer products. As an example, if we lower a price of a certain product, we are lowering the price to increase demand, but not too much to make it an inferior good, but low enough for it to still comply with the law of supple and demand.

CONCLUSION
! The law of demand and supple do have some inconsistencies that we have found

throughout our research. Apple started out to have a problem with too much demand and lacking supply. The demand was just so high to the point that they couldnt supply their products along with the demand. However, towards 2012, the whole problem turned around. They ended up having more supply than demand. The demand for the iPhone 4s signicantly declined due to saturation of the market. What Apple did is basically slowed down production to keep supply in phase with the demand and reach market equilibrium. They have to reach this market equilibrium all the time because if they dont, and have too much stock in hand, which does not meet with the demands of the market, these stocked goods would give the company loses because they are unsold and thus money isnt moving in the company."Some products also raised some questions concerning the laws of demand and supply. One inconsistency we found was that products may have differences than others. The giffen good continues to be a law defying property that will be difcult to change in its position now, but maybe can be changed in future projects for goods to comply with the laws.

REFERENCES
DARBINIAN, M. (2008). supply and demand. Retrieved from http:// encyclopedia2.thefreedictionary.com/Law of demand Heakal, R. (n.d.). Demand and supply. Retrieved from http://www.investopedia.com/university/ economics/economics3.asp Athow, Desire,. iPhone 4S Stock Update: None Left At CPW, Phones4U. Retrieved April 7, 2012 from ITProPortal. Web site: http://www.itproportal.com/2011/10/27/iphone-4s-stock-update-none-left-cpwphones4u/#ixzz1rX6NFYLD Unknown. The Law of Supply and Demand. Retrieved April 6, 2012, from What is Economics? Website: http://www.whatiseconomics.org/the-law-of-supply-and-demand Unknown, (1999-2006). Economics Basics: Demand and Supply. Retrieved April 4, 2012, from investopedia.com Web site: http://www.investopedia.com/university/economics/economics3.asp (Unknown 2006) Schenk, R (1997-2006). Scarcity and Choice. Retrieved April 3, 2012, from Welcome to Economics! Web site: http://www.ingrimayne.com/econ/Introduction/ScarcityNChoice.html (Schenk 1997) Former, Dan. Apples 4-million-iPhone-4S weekend in context. Retrieved April 6, 2012, from SplatF.com web site: http://www.splatf.com/2011/10/iphone-4s-weekend/ What is a giffen good, an example with graphs . (n.d.). Retrieved from http:// www.freeeconhelp.com/2012/01/what-is-giffen-good-example-with-graphs.html