Demand and Supply in the Economy
Demand and supply are fundamental economic principles. Economists employ the demand-supply connection to govern the efficient distribution of resources in an economy (Bryant, 2010). Economists do research and analysis on the roles of buyers and sellers in the price market for commodities and services. The demand and supply curves are used to illustrate the price behavior of consumers and suppliers, respectively. The demand curve represents the consumer surplus, whereas the supply curve represents the production excess. The consumer and producer surpluses are further affected by market efficiency, taxation costs, and the benefits of international trade. When the forces of demand and supply are overwhelmed by externalities, the government stabilizes the economy through various policies. Demand and supply thus can be identified as the backbone of the market economy.
Equilibrium in the Market
The producers and consumers of a commodity or service sometimes agree on the price and quantity. This agreement is shown through the intersection of the demand and supply curve hence equilibrium occurs. At the intersection point, a price mechanism brings about an equilibrium quantity and price. At equilibrium, the suppliers can obtain maximum profit because the suppliers face no pressure to reduce their production and lower rates to create more demand. A market equilibrium also results in a consumer utility and welfare. At the equilibrium, there is no excess demand hence the supply from producer is enough for the consumers. The consumer, therefore, can buy as much of the good as they wanted because the price is favorable too. At equilibrium of demand and supply, consumer and producer surplus is achieved. Consumer surplus means there is maximum welfare to the consumer for buying the good. There is also welfare to the seller from selling the commodity.
Market Efficiency and Marginal Benefit
The market is performing efficiently when a given amount of input produces goods and services to the maximum amount and production of additional output would require an increase in the level of inputs (Bryant, 2010). There is also market efficiency when the consumer surplus and producer surplus are at their peak levels. For each quantity of a commodity, the supply curve shows the lowest price that the producer of a good must get so that they can supply the additional unit. The minimum rate at which they supply their commodity must, therefore, cover the increase in total costs of producing another product. However, they will provide the additional output up to the point where the market price does not exceed their minimum supply price. The producer's minimum amount is the marginal cost. Consumer surplus means that the consumers want to purchase the goods at a different rate other than that of the market. As a result, they consume the additional output at a price above the market price until the marginal cost does not exceed the maximum rate. The consumer's marginal benefit and the producer's marginal benefit are therefore achieved at their maximum level.
Taxation Costs and International Trade
Costs of taxation have a significant impact on the producer and consumer surplus. Increase in excise tax reduces consumer and producer surplus (Bryant, 2010). After tax is imposed on a commodity, the price at which the consumer could have purchased it increases. The reduced purchases that result mean that the amount of sales by the seller reduces. The number of mutually beneficial transactions, therefore, minimizes the surplus that the consumer and producer could have achieved. This brings about a deadweight loss. Imposing a tax on a good which has a high elastic demand and supply causes a relatively significant decrease in amounted transacted hence a more considerable deadweight loss. However, the decline in the number of transactions on a good which is inelastic in its demand or supply is relatively small.
Benefits and Effects of International Trade
Goods and services that are traded internationally have a world price that consumer's purchase at throughout the whole world. The domestic producers thus must produce their commodities at a rate that is equal or less than that of the world price. When the private sellers provide their goods at a cost that is lower than the world price, they can sell their commodity internationally. The local supply increases until it achieves equilibrium with the world price of the product. At the equilibrium, the price by the private seller is less than the world price hence the local supplier will sell more commodities internationally. The price of the local seller rises in time to reach that of the world price resulting in a decline in domestic demand. The higher rate that raises the producer surplus covers the loss of consumer surplus due to increased prices. When local producers cannot compete with the world price, there is a boom in the import of the goods. The low price of the commodity increases the consumer surplus that offsets the reduced producer surplus.
Externalities and Government Intervention
When externalities occur, the market forces cannot produce optimal results. In case of an externality, the actual costs and benefits of a product cannot be determined. The resulting equilibrium, therefore, is false (Bryant, 2010). The producer bears no damage in case of a negative externality resulting in excess production. If the producer took this cost into account, there would be less production and a perfect equilibrium would be achieved. Presence of a positive externality means that the producer gets fewer benefits of the good or services hence less production. In order to reduce the inefficiencies to the economy, the government can internalize the costs incurred due to the negative externalities. The companies causing the externalities will bear the costs through taxes and fees. This way, they will compare the additional cost they incur as a result of the externality with the revenues and determine if it is profitable to produce. The government can also impose a property rights policy that allows victims of negative externalities to sue the offender for compensation due to the damage caused. The social convention policy and tradable pollution permits are ways that the government could reduce inefficiencies caused by externalities.
An Efficient and Equitable Tax System
A tax system that embraces equity ensures that the tax burden is shared in a fair manner among the taxpayers. The benefits principle further states that people should pay taxes depending on the welfare they receive from the government. In fact, the benefits principle emphasizes on those who earn high incomes to pay more taxes. The argument behind this is that the marginal utility of the wealthy people has less value than that of the employed. Also, people with relevant expenses should pay less tax than those with a similar amount of income but no necessary expenses. According to (Bryant, 2010) an efficient tax system minimizes the administrative burden and reduces any possible distortions to the economy caused by the tax. The benefit principles also work towards reducing the deadweight loss (Bryant, 2010). Besides, an efficient tax system also ensures that economic decisions are not distorted.
Conclusion
The demand and supply of a product can thus be used to derive several economic concepts such as consumer and producer surplus. A further investigation on the total surplus defines its relationship to the market efficiency, costs of taxation and benefits of international trade. In case the demand and supply forces fail due to externalities, the government comes in handy through various policies. Moreover, the government ensures more efficiency in the economy through an efficient and equitable tax system.
References
Bryant, W. D. A. (2010). General equilibrium: Theory and evidence. Singapore: World Scientific.
