ECONOMIC ASSIGNMENT 7
Theobject I picked was Corn Mar16. I decided to pick corn, which Ibought at 376.0. I bought it at the point the price was decreasingbecause before my purchase the price was 382.6 which then dropped to381.6 and further to 376.0. At 376.0, I bought the product with thespeculation that at one point the price will stop decreasing and willrise at a point. That compelled me to make the decision of buying.However, it did not go as the way I was planning, the price when to377.0. I decided to sell because I was afraid i was going to loss ofmoney. Had I waited a little bit longer, I would have sold at aprofit of 5.1. This is higher than the profit I made but I was afraidof waiting any longer.
Graphicalrepresentation of the Price
Theprice of corn during the period ranged from 360 to 381.4. This was arange of 381.4-360=21.4. This was a relatively low range consideringthat the exercise run for close to a month. This implies that theforces of supply and demand were in good play. The forces play tostabilize prices and ensure that the price remains at equilibrium.These can be explained as follows:
Supply,Demand and Pricing
Supplyand demand are the core determinants of prices in a market situation.What happens is that in a hypothetical competitive market, the unitprice for a commodity will swing and vary until it reaches aparticular point where it settles. Even if the price is not constantjust like the corn in my case, the price will be around a certainpoint. At this point, the quantity of the commodity required by theconsumers is equal to that provided by the suppliers at that pricinglevel (Robert,2008).This was the case in my product the reason as to why the price neverwent too high nor too low. The scenario is normally controlled byfour simple laws of demand and supply which state that:
If demand rises and supply remains constant, then such a situation leads to increased equilibrium price and raised quantity.
If demand reduces and supply remains constant, then there will be a decreased equilibrium price and quantity.
If supply declines and demand remains constant then ultimately, the equilibrium price will decrease and the quantity will rise.
If supply reduces and demand remains constant, then the equilibrium price will rise while the quantity will decrease.
Equilibriumis described as the combination of price and quantity where thequantity required by the consumers is equal to that provided by thesuppliers. It is determined by the four laws mentioned above and isindicated as the intersection point of supply and demand graphs. Abalanced market at equilibrium is a price such that the quantity thatthe consumers can exhaust at that moment is balanced with thatprovided by the suppliers (Feldstein,2009).
Analysisof Price Movement and Fluctuation
Theprice of corn remained relatively constant over the period of makingthe contract order, placing the order until selling the order. Theprice remained constant as a result operations of the forces ofdemand and supply. Usually price is derived from the operations ofsupply and demand. The derived market price is dependent on theoperation of the two components in the market. Normally, exchange ofgoods and services occurs as a result of agreement of the pricingbetween the buyer and the seller (Robert,2008).When such an exchange occurs, the agreed price is known as theequilibrium price or the market clearing price in which thecommodities exchange hands. The equilibrium price is determined asshown below:
Atthe point of buying the corn on 10thNovember the equilibrium price was 376.0. Previously, the price washigher but reduced slightly to 376 due to the operations of theforces. In the figure shown above both the buyer and the seller arewilling to exchange the quantity ‘Q’ at the price ‘P’. At themeeting point supply and demand are balanced creating the equilibriumprice. At any price beneath P, the quantity demanded is higher thanthe quantity provided (Feldstein,2009).In this case, consumers would be willing to purchase the productssupplied while the producers would not be willing to supply theproducts at lowered prices. As a result, there would be shortage ofthe commodity. Consequently, the consumers would have to spend moreon for the products in order to satisfy their needs while thesuppliers would be expecting higher prices to satisfy the market bybringing in more produce. Ultimately, the prices will have to riseagain until the demand and supply for a particular product arebalancing (Feldstein,2009).
Similarly,if prices were to move above the point P, the market would be inexcess of the product. In such a situation, the suppliers orproducers will have to decrease the prices because they need to clearthe market of the surplus. As a result of the lowered prices, theconsumers would be tempted to purchase the product in huge volumes upto a point where price stabilizes again.
Profitand Loss Analysis
Duringthe trade-off, I made a profit of 377-376=1. the highest profit Iwould have made would be 381.4-376=5.1. Though the profit was smallof just 1 unit, I consider myself lucky because I could even havemade a loss. At one point the 360 which implies that at that point Iwould have made a loss of 360-377= (17). This would have been a hugeloss. I was generally happy with the exercise because I did not makea loss at the end which implies that I was lucky a speculation(Vienneau,2005).
Theexercise was a success and fun. I learnt a few skills aboutspeculation and business skills. I was happy that I did not make aloss but instead made a profit of 1 unit. Through the forces ofdemand and supply, prices will rarely move too high nor too low. Theprices will always be allowed the equilibrium price. Equilibrium hasbeen described as the combination of price and quantity where thequantity required by the consumers is equal to that provided by thesuppliers. This price determines the pricing level of any competitivemarket.
Feldstein,P. J. (2009).Health Care Economics (5th ed.). Albany,NY: Delmar Publishers
Robert,F. (2008).Microeconomics and Behavior (7th ed.). London:McGraw-Hill
Vienneau,R. L. (2005). "On Labour Demand and Equilibria of the Firm",Manchester School,V. 73, N. 5: 612–619