Supply Demand and Price Elasticity Essay

We use multiple products on a daily basis, from toothpaste to ink pens. Though we may use these items for mere moments, there is a different supply and demand cycle for them. Every product has a different supply and demand cycle, and this cycle varies throughout time. Some items may constantly be in demand, like cotton, and others may be in demand seasonally, like eggnog. These shifts in supply and demand may influence the price of certain products, how much of the product is available at any given time, etc. Commodities available during only peak times throughout the year may even be substituted with a similar item.

These seasonal items are considered inelastic whereas easily substituted items possess elasticity. Price elasticity of supply is a way to measure the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product’s price (Hubbard186). Price elasticity of demand is a way to measure the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price (Hubbard168).

A specific product to study under the conditions of supply, demand, and elasticity is cotton. Cotton is a very versatile resource and its uses vary widely. It is present from bath towels and bed sheets to coffee filters and bookbinding. Cotton is used in crocheting and knitting, and also blended with other fabrics, such as rayon. With so many uses, shifts in the demand for cotton are very subtle. Demand remains at an almost constant high because of the diverse uses among industries. The supply of cotton is at an elevated rate to meet this demand.

Recently, the National Cotton Council of America released its top 10 producing countries for 2010. Number one is the People’s Republic of China at 29 million bales per year. The lowest-ranking country is Argentina, producing one million bales per year. Because cotton has a variety of uses, the supply and demand of this product consistently remains high. There may be subtle fluctuations of demand between industries from time to time, but that would be the only genuinely noticed change. Although it is most common hat only subtle fluctuations in the demand for cotton occur, any shift in supply and demand can greatly influence the price, quantity, and market equilibrium of cotton. When market equilibrium is reached, the amount of services or goods provided equals the quantity of product that is available on hand to sell. The fundamental principle of law and demand states that when the price of a product decreases, then the quantity demanded will increase. Similarly if the price of a product increases then the quantity demanded will decrease.

This can also be explained by using an economic model. If there is a shift to where the quantity of cotton supplied is at a higher price and consumers decided to buy less of it, there will be a shift to the left on the demand curve. If the price decreased and caused an increase in the supply demanded, we would see a shift in the quantity demand curve to the right. Cotton is both a necessity and a luxury product, but more so it is a necessity because of its many uses mainly in the clothing industry. Cotton is one of the 10 major commodities.

According the National Farmers’ Federation (NFF), “of all fiber sold worldwide over 40% is cotton. ” Cotton has been one of the major commodities for centuries, dating as far back as 200 A. D. (Anno Domini) during the Guptan period. Presently, the top ranked exporting nations are the United States, Brazil, Uzbekistan, and Australia. Out of the top exporting nations Australia ranks first, which is approximately 30% of world production. Even though its production is high, substituting cotton is easily done. One of the most popular substitutes for cotton is petroleum-based polyester.

Although very popular, polyester is known to be bad for both the environment and people because of all of the chemicals involved during its production such as formaldehyde. The production of polyester is considered as planet polluting. Another substitute would be Organic cotton, which is pesticide free and tinted naturally. Hemp is also a good substitution for cotton. According to the Hemp Industries Association, hemp has fewer pesticides than cotton. Cotton, when blended with other fabrics, can be substituted for 100% cotton making it less expensive than other fabrics like linen, wool, spandex, silks, and lycra.

Because cotton is so popular, an increase in price does not automatically mean that there will be a decrease in the quantity demanded. Since the first choice for clothing is cotton, people will continue to purchase clothing and there will not be an effect on the supply demanded, even with a price increase. With essential commodities, price increases will not negatively affect the quantity demanded. Cotton has an inelastic demand because the quantity is not affected (Elastic and Inelastic Demand). Cotton is one of the most widely used products today.

It is noted as having an inelastic demand because of the various other products that can be used in place of it. A change in price will more than likely have no effect on the decision to utilize its benefits, as it is present in many luxury and necessity items. However, if pricing is changed, causing a change in demand, businesses could notice shifts in the quantity demand curve either to the left or to the right. Cotton is more of a necessity item, and its demand is constantly expected with the only real changes noticed in supply. With substitutes readily available, cotton and its likes will be available to our economy for years to come.

References

“Elastic and Inelastic Demand.” Everyday Finance: Economics, Personal Money Management,and Entrepreneurship. Vol. 1. Detroit: Gale, 2008. Gale Virtual Reference Library. Web.3 Apr. 2011. Hubbard, R. and O’Brien, A. (2010) Economics pg 168-186 (3rd ed.) Boston National Farmers’ Federation http://www.nff.org.au/commodities-cotton.html http://www.historyforkids.org/learn/clothing/cotton.htm

http://www.grist.org/article/of-classrooms-and-closets
National Cotton Council of America (2011). Retrieved March 30, 2011, from http://www.cotton.org/econ/cropinfo/cropdata/rankings.cfm