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Demand and Supply

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In the Report Consumer Price Index and Calculate the CPI are Discussed in Details

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Introduction

In this report concept of demand and supply are covered. In order to understand their impact on price of the product demand and supply curve equilibrium diagram is considered. This diagram is analyzed from various angels. On other hand, in the report consumer price index is discussed and ways that are adopted in order to formulate and calculate the CPI are discussed in detail. At the end of the report, important points that are considered while calculating index value are also described in detail.

(1) Demand and supply

In order to predict changes in price of the product concept of demand and supply is used by the common people and companies as well as economists. In respect to this concept of equilibrium in demand and supply is used by the firms. According to this concept there must be equal demand and supply in the market. If this will happen in the market then there will be stability in the market price of the specific product. If this will happen then economy will remain stable and it will grow at fast pace without any hindrance. When a number of consumers increase in the market then demand for products also increase in the market. Thus, it becomes necessary to increase supply according to traction in demand that is observed in the market. Sometimes it happens that demand increases but supply does not increase and if it increases then small positive percentage change happens on it (Cusack, Iversen and Rehm, 2006). Due to this reason gap between demand and supply comes in existence. Due to high demand and less supply price of products elevated in the country. Thus, people are forced to pay more for buying a specific quantity of a product then they pay earlier. In order to understand this thing concept of equilibrium of demand and supply is explanation in detail.

From chart it can be seen that green line indicates a demand for the product. Whereas, blue line indicate a supply curve. At point P both lines intersect each other and this is equilibrium point because on this point demand and supply are equal to each other. This point is determining a price for the product that is Q (Chapagain and Hoekstra,  2008). Hence, it can be said that here due to equal demand and supply price of the product is stable. Now in order to understand impact of increase in demand on price of the product following graph is used.

demand and supply

From chart it can be seen that green line indicates a demand for the product. Whereas, blue line indicate a supply curve. At point P both lines intersect each other and this is equilibrium point because on this point demand and supply are equal to each other. This point is determining a price for the product that is Q (Chapagain and Hoekstra,  2008). Hence, it can be said that here due to equal demand and supply price of the product is stable. Now in order to understand impact of increase in demand on price of the product following graph is used.

increase demand of the product price

In this chart we can see that there are two price levels in an image one is P1 and second is P2. These are two price levels at equilibrium point can be seen at a point where demand curve is intersecting supply curve. This means that at this point both demand and supply are equivalent to each other. But with change in economic environment supply remain same and demand for the product get changed (Bowen and Sosa, 2014). Here difference between demand and supply comes in existence. Due to this reason price of the product increased by the suppliers of the product. Overstocking of goods is common unethical practice in such kind of situations. Due to overstocking of goods supply of product reduced in the market. As a result, sharp elevation in price of food items and other product is observed in the market. Hence, in this way, due to increase in number of customers disequilibrium in demand and supply comes in to existence.

Practical application of demand and supply framework in terms of price

As per facts it has been find out that till FY 2018 growth rate in food items price will be greater than growth rate in salary. This is estimated because due to worse economic conditions import become dearer and population of UK is increasing because every year numerous people comes in UK and reside in the mentioned nation for study or for any other purpose. Due to this reason demand for food products is increasing sharply. But supply of these products is not available as per demand. Due to this reason, price of food products surge sharply (Carlin and Soskice, 2005). This is evident from the fact that cost of putting food on table raised by about 3%. Cost of eating on restaurant also increases sharply. It is also find out that weather conditions in exporting countries like India and China was not good and due to this reason supply from their side get reduced. Moreover, consumption level of middle class people in these communities also increases. Due to this reason also supply from these nations reduced. As a result, supply of food products in UK gets reduced. On other hand due to increase in population and improving economic conditions demand for food products get increased in the UK. Hence, big difference between demand and supply comes in existence in market. In order to ensure availability of food to all and active role of market forces demand for food products get plunged. As per facts in past year food prices raised by 10.2% (Andrade and et.al, 2009). Alone vegetable price rose by 5.4% followed by meat 5.2% traction in price and price of fish rose by 4.9%. So from entire scenario it is clear that with increase in population and fall in supply price of products get increased in the market.

The way in which CPI is Calculated in the UK

CPI is also known as consumer price index and under this inflation is measured by the UK government. In this regard price of all products that are part of CPI are taken and compared with previous year prices. By doing this percentage change in goods price is identified by the analyst. All these goods are given certain weight age in the index and as per weight age their price change is placed in the index. After that index newly calculated value is compared with previous value (Constitutes, 2014.). This indicated that overall inflation increasing or decreases in the current quarter as compared to the previous year.

In order to collect data related to price change there is a mechanism that is followed in order to compute accurate inflation rate. In UK data is collected about 520 items and 1, 00,000 prices are taken in relation to them from the market. For this purpose special employees are ordered by the firm. These employees are employed by TNS. These people collect data from TNS on behalf of ONS. In this regard these special employees visit shops that are in 150 locations. From these shops price data is collected either through direct interaction or but by using telephone. In this regard one main point is that these employees always visit same shop and due to this reason they get an accurate view of changes in price of the product (Diewert, 2009).
In current business situation environment is changing at a fast pace and newly launched products get disappeared after few months or years. Hence, this creates a problem for analysts to calculate actual inflation rate. In order to remove this problem product that have similar qualities and features is included in the index at place of that product that disappeared from the market. Due to this reason even any product get disappeared from the market analysts does not face any problem in computing inflation rate for the products (Poulter, 2015). If this option is not available then prices are adjusted in order to make sure that even accurate alternative of pricing is not available then also almost accurate inflation rate will be available to those who formulate monetary policy for the country.

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In CPI weight age is given to various items in the index. This is done in order to show importance of various items in the average shopping basket of the people. CPI weight age is based on monetary expenditures that are made by the private households and foreign tourists in UK. These weights are normally given to the items on the basis of data made available by household consumption expenditure section of national accounts (Consumer price indices a brief guide. 2015. In order to ensure that index is showing a true picture it is kept up to date. These items in the index are updated regularly in order to ensure that UK purchasing patterns are identified regularly. In this regard wide range of information’s is taken in order to prepare ingredients of the CPI product portfolio. In respect to this ONS survey on household spending, feedback from price collectors and research data is used by the authorities.
So, it can be said that wide mechanism is operating in this regard and every effort is made to make sure that index is making accurate inflation rate that is in the country.

Conclusion

On the basis of report it is concluded that demand and supply plays an important role in determining product price. In order to bring stability in the prices it is necessary to bring equilibrium demand and supply. If there will not be equilibrium then there are mostly chances that price of product will increase it analyze current business environment. CPI plays an important role in identifying the extent to which prices of goods are increasing in an economy. Concerned authorities already formulate several alternative ways by using which accurate inflation in food and non food products can be measured. Basket of products in CPI are updated regularly and due to this reason general public and policy makers easily get a direction in which they needs to work.

References

  • Andrade, N. and et.al., 2009. Resource demand and supply in BitTorrent content-sharing communities. Computer Networks.
  • Bowen, W.G. and Sosa, J.A., 2014. Prospects for faculty in the arts and sciences: A study of factors affecting demand and supply, 1987 to 2012. Princeton University Press.
  • Carlin, W. and Soskice, D., 2005. Macroeconomics: imperfections, institutions, and policies. OUP Catalogue.
  • Chapagain, A.K. and Hoekstra, A.Y., 2008. The global component of freshwater demand and supply: an assessment of virtual water flows between nations as a result of trade in agricultural and industrial products. Water international.
  • Constitutes, H.S.H., 2014. Consumer Price Index. Policy.
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