Using Demand And Supply Analysis, Explain How Resources Are Allocated Through Changes In Price In A Market Economy There are two main kinds of markets, they are commodity markets where consumer buy goods and services; and factor markets when producers purchase resources such as labour.
If a demand of a commodity increases, e.g. laptop, the manufacture Apple, for example, will need to increase resources to construct them. In diagram 1 below, the demand for laptops shifts to the right, from D to D1. This then creates a new equilibrium price; it shifts to the right from point E, where 3500 laptops sold at $3500, to point E1, where 4000 laptops sold at $4000. After a relatively short period of time, the supply of laptops increases from S to S1 to satisfy the increased demand of laptops, it then creates a new equilibrium price. The equilibrium price shifts from point E1, where 4000 laptops sold at $4000 to point E2, where 4500 laptops sold at $3700. Because the supply of laptops has increased to satisfy the increased demand of laptops, the availability of laptops is no long as tight; therefore the price is dropped from p1 to p2 but above the original price of point p if the demand remains greater than the supply.
The increased demand for laptops means that Apple, for example, will advertise for more people to work in its factories. To encourage more people to work for Apple, it may have to offer higher wages. This then leads to an increase in the supply of workers willing to be employed by Apple. In the diagram 2 below, the demand of labour is the producers while the supplier of labour is the workers. The demand of labour increases and it shifts from D to D1. This then creates a new equilibrium price; it shifts to the right from point E, where 3500 workers are employed at $35000 p.a.; to point E1, where 4000 workers are employed at $40000 p.a.
Therefore, the increase in demand by consumers for laptops results in an increase demand for factors of production i.e....
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