Page 249 - Encyclopedia of Business and Finance

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Economics

bread, there is a point at which adding additional fertilizer create more demand for their vacant weekend rooms by
to the soil would do no good. If the fertilizer were used on lowering prices and offering attractive amenities.
an oat crop in a different field, production could be The law of demand states that during a specific time
increased for that crop. The way to increase the wheat pro- period the quantity of a product that is demanded is
duction is to find different resources to make the crop bet- inversely related to its price, as long as other things remain
ter, such as irrigating the land to provide more moisture. constant. The higher the price, the lower the demand; the
In the above example, it was suggested that different lower the price, the higher the demand. Do not confuse
or additional resources might be used to increase produc- demand with wants. Consumers have unlimited wants, as
tion. This is necessary only after efficiency has been was established at the beginning of this discussion. Nor
achieved. Additional resources would have to come from are demands and wants the same as needs. A consumer
land, labor, capital, or entrepreneurship. It is most com- may need to have a crown put on a tooth but may not
mon that capital will be used most often to increase pro- want to have it done because of the high cost. At some
duction. Capital is productive input that is increased by point, the suffering patient may demand the services be
people. This is known as investment. Investment involves provided regardless of the price.
giving up what might presently be consumed in favor of Often when prices are too high and demand for a
producing something to consume in the future. If the product or service lessens, it is because consumers have
farmer wants to increase wheat production in the future, found a suitable substitute. Substitution happens all the
something will have to be given up now in order to time as a result of economic decisions that are made by
increase the resources available for future production. consumers. For example, if someone needs a winter coat
Increasing human capital is critical to increasing pro- and likes one with a designer name and a price that
duction. This does not mean that more people must be reflects that name, the purchase may not be made.
produced, but rather that the knowledge and skills of Instead, the person finds a similar coat that does not have
humans must be increased. This can happen because of a designer label and purchases it instead at a much lower
improvements in technology and new ways of satisfying cost.
wants. This involves the entrepreneurial factor that was Demand for goods or services determines the amount
described previously—the human element that figures out that will be supplied. The law of supply states that the
ways to improve and expand the resources that already greater the demand, the more that will be supplied; the
exist. lower the demand, the less that will be supplied. The
amount that will be supplied by a producer of the good or
Product Distribution. Getting goods into the hands of service is based on capacity and willingness to supply the
those who want them involves many choices. The eco- product at a specific price. A producer will not supply
nomic system must decide how to divide the products goods and services just because there is demand for
that are produced among the potential recipients. Some- them—price for the good or service is an important con-
times products can be divided equally among recipients, sideration.
but normally this is not the situation. It must then be If consumers are willing to pay more for a good or serv-
determined how the division will take place. In a capital- ice, the producer will likely be willing to shift more
istic economic system, distribution is often determined by resources in order to increase the supply of the demanded
wealth. If two people have the same wants, the person product. If a rancher is raising prime beef cattle and there is
who can most afford something will be able to acquire it. high demand for this good and consumers are willing to
pay more for high-quality beef, then the rancher might be
THE LAW OF SUPPLY AND willing to supply more even if it is necessary to shift
DEMAND resources or acquire additional resources to be able to do so.
Production decisions are made based on demand for Demands change, supplies change, and prices
goods and services. Supply of goods and services is change. So how does a producer know how much is
dependent upon demand for the same. Why do movies enough and what price to charge for the goods and serv-
that are much more popular stay at theaters longer than ices? Very simply, the demand for and supply of goods and
those that are not as popular? Demand for the movie services can be plotted on graphs using different prices.
causes the theater operators to supply the showings that The supply and demand for a good or service intersect on
the consumer wants. Why does the room rate in a conven- the graph at what is called the equilibrium price, or the
tion hotel go down on weekends? There is less demand on price where all of what is supplied will be demanded. If
weekends because most convention-goers leave on Friday the price is below equilibrium, there will be a shortage of
or Saturday and others do not arrive until Monday, so the the good or service, and if the price is above equilibrium,
supply of available rooms goes up. Hotel operators try to there will be a surplus of the good or service. For a more

226 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION