Contraction Of Demand Essay

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The Law of Demand states that “there is an inverse relationship between the price of a good and demand. As prices fall, we see an expansion of demand. If price rises, there will be a contraction of demand (Riley, 2016).”

In the world of economics ‘demand’ refers to one’s willingness and ability to acquire goods or services. This means that one desires something enough that they are willing to procure it, therefore, creating a sense of demand. However, simply desiring a good or service is not the sole meaning behind demand. Along with the desire to procure an item or service comes the ability to do so. If one does not have the means to procure said goods or services then their desire is useless. Having the ability to obtain services or …show more content…

Imagine that everyone wanted more plastic, therefore driving up the demand for plastic. This demand would mean that the supplier could drive up the cost for the plastic so they could make more money. Using the corn to make the plastic is far cheaper than using fossil fuels. A chain reaction causes more and more people to produce the plastic which in return floods the market with an abundance of plastic and driving the cost down. On the other end, the cost of the corn has increased as the supply diminishes, leading many manufacturers to buy up what corn they can get their hands on. This example is simple and does demonstrate how the supply and demand theory is balanced. In reality the market is far more accountable and supply surprises are rare. The supply and demand process explains the fluctuation of prices from year to …show more content…

People normally make selections based on how it benefits them either the least expensive way or the prospect of better benefits over the actual price. Looking back at the plastic, producers will hire more individuals for production only when the cost of plastic and the sale of the product validates payroll and materials needed to produce the plastic. In comparison, the customer will purchase the best plastic they can manage to pay for which understandably may not be the best plastic to buy.
The cost, benefits and rational expectations contain another element –incentives. Incentives aspire the world and are very beneficial but they can also be destructive. Incentives are generally part of an organization’s objectives. Incentives that are effective usually become part of the company’s operating process. However, incentives can fail causing the organization long term financial stress. Keeping incentives in balance with the organization’s goal must be carefully monitored so as not to drive it off course causing the CEO to milk other resources to meet his/her obligations to those promised

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