To understand a commodity’s equilibrium price and quantity after a decrease in the people’s income and an increase in the cost of inputs that firms use in production, it is prudent to identify the various forces that affect supply and demand. Commodity supply, demand, and equilibrium are the most fundamental concepts in economics and the basis of a market economy. The quantity demanded refers to the amount of the good or service that customers are willing to purchase at a certain price. The demand relationship is the association between the needed amount and price. On the other hand, supply refers to the quantity of the product that the market can offer. The relationship between supply and demand underpins the forces influencing the allocation of resources. The theories of market economy highlight that commodity demand and supply involve the efficient distribution of amenities.
The interaction between the producers and consumers in a free and competitive market determines the equilibrium, quantity, and price of a given product. The changes in people’s income have a direct impact on the equilibrium price and volume. An increase in income, while all other factors remain equal, amplifies the demand.
Furthermore, a rise in demand shifts the demand curve forward.
Additionally, if the producers are unable to meet the growing demand with a corresponding rise in supply, then the price of the commodity increases to attain equilibrium. On the other hand, a decrease in income results in the reduction of demand and a corresponding decline in price, as long as the supply and other determinants remain constant.
Considering that all factors are constant, changes in supply will have a consequent change in demand. Therefore, events that affect supply, such as input prices, natural conditions, or government policies, will result in a change in the balance, amount, and price of the good in the market. In the case at hand, the increase in the cost of raw materials that organizations use to produce ‘Good X’ will result in an overall increase in their operational costs. This shift also adversely affects their ability to supply the same amount of the good at the initial price. In this respect, the producers will either increase the good’s price or supply a lesser amount of it at the established price.
Considering that the two events (a decline in the people’s income and a rise in raw materials costs used to provide “Good X”) occur simultaneously, then the overall effect is that their impact on the equilibrium price and quantity of the product may end up canceling each other out. The reduction in income will result in a decrease in demand and subsequently, a decline in price. On the other hand, the increase in inputs will lead to a reduction of supply and consequently, a rise in prices. The two effects imposed on the balance, price, and amount oppose one another. In this respect, they will equally cancel out because they co-occur. The converse nature of the impacts will result in the stabilization of the price and volume of the good at the initial levels.
The respective illustration provides an understanding of the implications that the forces of supply and demand impose on price and availability of goods. Accordingly, these forces indicate that the market economy comprises relationships that influence accessibility to goods and services, availability of raw materials, and the changes in price.