Recently, most of the countries in the world had beginning to recover from recession that stroke the economy worldwide since end of the year 2008. Classical economics show up a relatively static relationship among demand, supply and price. The circumstances in the economy are determined by the level of demand and supply. Undoubtedly, the level of demand is one of the most significant economic factors but is affecting by a number of factors.
Demand is defined as an interaction between the price and the quantity demanded of particular product which demonstrated by a schedule or curve to show the willingness and the capability of consumers to purchase at a particular price. The fundamental determinants of demand are the effect of prices where an inverse or negative relationship occurs between price and quantity demanded according to the Law of Demand (Parkin, 2008; McConnell and Brue, 2008). The Law of Demand stated that the demand curve is slope downward which illustrates the quantity demand of a particular good will higher when the price is lower and on contrary, the quantity demand by consumers will less as if the price is higher. The changes between the price and quantity demanded can be shown by movement along the demand curve (Perloff, 2009). The Law of Demand can be explained in the terms of Income effect and Substitution effect. The Income effect indicates that a change in price will affect the purchasing power of consumer to become better or worse off consequently due to the price changes. As for the Substitution effect indicates that a change in price will affect the consumer switching to or from alternative or ‘substitute' goods (Sloman, 2003).
After concentrating on the role of price in determining demand, certainly there are other factors nevertheless have the same characteristic on affecting the level of demand. One of the key determinants of demand is the level of income. As an abstraction, a change in income of the consumers will affect the levels and capability of purchasing particular goods and services. At a same situation where the income had increased, the demand will increase as well and that called normal goods. By contrast, the demand will decrease are known as inferior goods (Hubbard and O'Brien, 2008). Another determinant is prices and availability of related goods. Substitute goods are alternative options for consumers to choose under one consideration. As the price of substitute products falls, the demand for the products will fall. For example, condominium and apartment that offered by construction company. Inversely, the demand for the product will fall when the price of complementary product rises. Complement products are different goods that are used together under one consideration for example, interest rates that charges for loans to buy the condominium increased. Yet, another determinant of demand is the expectation in the future. If one foresees the price will rise in future, the demand will likely to decrease at current time. On the contrary, the demand will rise as one foresees the price will go up in future (Hubbard and O'Brien, 2008).
Market equilibrium is a situation, in which a state of balance between market demand and supply at a particular price, the quantity demanded and the quantity supplied are equal. Hence, there is no elemental intention to change in price or quantity since there is no surplus or shortage in the marketplace (Parkin, 2008). This can be shown by the diagram below:
At the point E, market is equilibrium when the price reached OP1, the quantity demanded is equal to the quantity supplied. Assumed that neither the two curves are shifting, thus the market forces will up hold the equilibrium price. For instance, assumes that the price increased in excess of OP1, the producer will supply more to earn more profit but at the same time, the demand will decrease. This will result in supply exceed demand and surplus occurred. At this point the supplier will reduce the prices to encourage more demand of the products until market reached equilibrium again (Sloman, 2003).
Price elasticity of demand is the responsiveness of quantity demanded to a change in price. The percentage change in the quantity demanded in resulting from a percentage change in its price (Pindyck, 2009). It usually appears to be a negative figure. For instance, if price elastic equal to -2, then it means that the elasticity of demand is 2 in magnitude. If the price elasticity is more than 1 in magnitude, then the demand is elastic due to the percentage decreased in quantity demanded is more than the percentages increase in price. By contrast, if is less than 1 in magnitude, therefore it is price inelastic (Pindyck, 2009). Construction industry in the case has shown price inelastic, meaning that changes in price may lead to a less changes in quantity demand.
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