Реферат: Demand And Supply Essay Research Paper Every

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Demand And Supply Essay, Research Paper
Every organisation which provides goods or
services to fee paying customers must, by its very
nature, charge price for that good or service, to
pay for its costs, have retained profits for
investments and to keep its shareholders happy. In
theory, the market price of any good or service is
determined by the interaction of forces of demand
and supply. There is an old saying, that ?if you can
teach a parrot to say ?demand? and ?supply? you
have created a trained economist.?1 There is some
truth to this saying as most problems in the
economics can be examined by applying the rules
of demand and supply. Therefore, the concepts of
demand and supply can be claimed to be among
the most important in economics. In order to
understand either of them it is necessary to
examine the factors that determine them. Although,
a good?s price relative to other goods is probably
the most important factor influencing demand for
most goods most of the time, there are other
factors as well. These are disposable income, the
price of complimentary goods and substitutes,
tastes and preferences, expectations, size of
population, advertising. Suppliers on the other
hand are interested in making profits, and thus
anything that affects profitability affects the supply.
These include the price of other products, costs,
technology and goals of firms. a) The price of any
product is determined by the interaction of the
forces of demand and supply. The market price is
set at the point, where demand equals supply,
equilibrium. This can be seen from figure 1. For
the purpose of this essay we will look at the prices
of beer. We can see that, the price is set at 1.65,
where D intersects S. Fig. 1 The Penguin
dictionary of economics defines demand as ?the
desire for a particular good or service supported
by the possession of the necessary means of
exchange to effect ownership?, while supply is
defined as:? the quantity of a good or service
available for sale at any given price?2. When an
economist refers to the demand for a product he
means effective demand, which may be defined as
?the quantity of the commodity, which will be
demanded at any given price over some given
period of time.?3 However, the price of the good
or service varies according to the changes in either
demand or supply. In order to show that it is
necessary to look at determinants of demand and
supply separately. One of the factors that might
affect the demand for beer is a disposable income,
income less taxes. For most of the products, when
disposable income goes up the demand goes up as
well, and vice versa, thus affecting the price of the
product. A rise in income leads consumers to buy
more of a product, as they have more money to
spend. This can be seen from figure 2. Fig.2 Thus,
we can see that, when income rises, demand shifts
to D1, and since S curve remains the same, the
price of beer goes up to 2.00. The other factor
that influences demand for beer, could be the
change in consumer tastes and preferences. Some
industries like clothing and furniture are more
affected by it than the others. However, in beer
market it also has a great effect. It can go out of
fashion if consumers believe that, it is more
fashionable to drinks spirits or not to drink at all,
and vice versa consumers might decide that beer is
more fashionable than spirits. The effect of fashion
and tastes on the prices can be seen from figure 2.
If beer becomes less popular D shifts to D2 and
the price becomes 1.45, while if it is more
fashionable D shifts to D1 giving the new
equilibrium price of 2.00. Another factor, which
influence demand, is the price of other products,
substitutes or complementary goods.
Complementary goods are purchased together to
satisfy one want, and these goods are in joint
demand. For beer, the best example could be
pubs and night clubs. If the prices of admission to
night clubs goes up, the demand for beer is likely
to go down and thus the price will go down, so in
figure 2 the D curve will shift to D2 thus giving the
new equilibrium price of 1.45. On the other hand,
if night clubs were to make the admission free
more people would go and they would have more
money to spend, thus shifting D curve for beer
would shift to D1 giving the new price of 2.00. In
modern world the advertising can also cause
changes to the demand. A successful advertising
campaign can increase the demand, and thus
price, by shifting the demand curve to the right and
at the same time move the demand curves of the
competitors to the left. Change in legislation can
also affect the demand for beer. If the government
decided to decrease the age of those allowed to
buy beer to 17 or 16 the demand for beer would
have shifted to the right to D1 giving a new
equilibrium price. Price changes can also be
caused by change in one or more of the
determinants of supply, like costs or technology. ?
Supply curve is drawn on the assumption that the
general costs of production remain constant?4
Therefore, if any of the costs change, it will result
in the changes in supply and thus prices. In the
beer industry there are many costs to consider,
there are production costs, transaction costs and
the costs of the raw materials. The government
can also force the companies into higher costs, like
the introduction of the minimal wage, which will
increase the company?s costs. If the costs increase
at any given level of output the producers will
attempt to pass on these increases on to
consumers in the form of higher prices. If they are
unable to pass on to consumers they would face
lower profits, thus giving less dividends to the
shareholders, which even might result in company
going out of business. The company would start to
produce less of the product, as it is less profitable,
thus shifting supply curve to the left. On the figure3
the supply will shift to S1 thus giving a new
equilibrium price of 2.00. Fig. 3 On the other
hand, technological advances would increase the
supply. If new technology is introduced to the
production process it should lead to the fall in the
costs of production. This greater productive
efficiency will encourage firms to produce more at
the same price or produce the same amount at the
lower price or some combination of both. The
supply curve will shift downwards and to the right
to S2 giving the new equilibrium price of 1.45. It
would be unusual for firms to replace more
efficient technology with less efficient. The other
factor that might affect the supply of the beer is the
future expectation. If firms expect future beer
prices to be much higher, they may restrict
supplies and stockpile beer. If they expect the
prices of raw materials like hops to be higher they
might decide to buy it in advance at the lower
prices so that to keep costs stable. The amount of
changes in price and quantity depends on the price
elasticity of demand and supply, as they affect the
slope of the curves. Price elasticity of demand is
the responsiveness of changes in quantity
demanded to changes in price. The more inelastic
the demand for a product is the greater the change
in price is, and vice versa the more elastic the
demand curve is the lesser the price change is.
This can be seen from the figure 4., D1 is the
perfectly inelastic demand curve while D2 is the
perfectly elastic. Fig. 4 The price elasticity of
supply is the responsiveness of quantity supplied
to a change in price. It is measured by dividing the
percentage change in quantity supplied by the
percentage change in price. For both PED and
PES the factors affecting them are substitutes and
time. b) It is useful to look at demand and supply
analysing when dealing with prices, and many
authors regard it as rather useful. ?Demand and
supply diagrams provide a powerful and simple
tool for analysing the effects of demand and supply
on equilibrium price and quantity.?5 However
economic analysis of demand and supply has
many limitations and assumptions. As J.
Beardshaw states:? It is only possible to reach any
conclusions so long as we keep the rule of only
considering one change at a time.?6 Economists
when dealing with any kind of microeconomic
problem always preface any statement with the
phrase ?all other things remaining constant? or
?ceteris paribus?. Therefore it can be seen that in
real life when dealing with the real business and its
pricing policy it would be difficult to place such a
problem solely on the economic analysis.
Businesses have to deal with more than just one
change at a time. Economic analysis also shows as
a ?perfect? world or business environment. It does
not take any account of factors like corruption for
example. In some developing countries it is
possible to be more cost efficient than its rival and
charge lower prices, but not be able to compete
as its rivals have good connections with the
government. The example of this could be my
home town Kiev, small breweries which charge
lower prices are unable to compete with the
?Obolon? brewery, as the latter has a tender with
the mayor for providing beer to all public and
sport events. Microeconomic analysis assumes
that the more efficient the company is in cutting its
costs, for example, the lower the prices its going
to charge. In reality however, it is difficult to think
of a company, which would do that, if it can
increase its profit margins and keep the stable
demand for its product, especially, if its rivals
charge the same amount and not lowering their
prices. The other assumption of this analysis is that
the equilibrium price is the current market price or
the price toward which the market moves. In
reality the market price could be at any level.
There could be excess demand or excess supply
at any point in time. This can be seen from the
examples of CAP (the Common Agricultural
Policy) and OPEC (the Organisation of Petroleum
Exporting Countries). The other basic assumption
is that any change in either demand or supply
affects the price. However, in beer industry there
are increases and decreases in supply due to the
holidays for example, and the prices tend to
remain the same. During Christmas for example,
there is an increase in demand for beer and other
drinks, people celebrate, go to restaurants and
pubs, thus according to the demand and supply
theory the prices would have to go up. (see Fig. 2)
In reality however, the prices tend to stay the
same or in some cases, like supermarkets, even
drop. This phenomenon can be explained by the
oligopolistic competition and the games-theory.
The demand and supply analysis assumes free
(competitive) markets. However, if we have
market occupied by just a few firms, like British
brewing industry, which is dominated by
Scottish-Courage, Bass, Whitbread and Allied
Donecq7, ?the analysis may be rather different?8.
Firms in such markets make decisions on price
and output taking into account the expected
decisions or reactions of the other rival firms. This
sort of market is known as an oligopoly.
?Oligopoly theory is concerned with market
structures in which the actions of individual firms
affect and are affected by the actions of other
firms.?9 As far as business planning is concerned,
it is impossible for a business to solely use demand
and supply analysing when making plans for a
future. This is mainly because it is only a theory,
and when faced with actual quantities it is difficult
to estimate an actual increase or decrease in the
price of a particular product. The businesses most
probably would make such decisions based on the
feelings of their shareholders, due to the fear of
?going under?, if their shareholders are not satisfied
they will sell shares and the company will be
vulnerable to take-over bids. In conclusion, it can
be seen that the principles of demand and supply
have a theoretical influence on price determination.
The theory provides a useful and simple tool in
determining the price of a product by the means of
demand and supply, an equilibrium price.
However, the theoretic approach, uses many
assumptions, which limit the application of theory
to the real business environment. It is useful for
academic purposes, while it is difficult to imagine
that actual businesses will follow it in the business
planning process. It is also difficult to use it as the
theory assumes the perfect market, which does
not exist, with few exceptions, newsagents being
one of these. In other forms of competition firms
would base pricing decisions on expected
decisions of their rivals (oligopoly), or would
decide by themselves taking into account only their
needs (monopoly). Thus, it can be concluded that
companies would adopt their pricing policy on the
environment they operate in, probably without
even using the theory of demand and supply.

Название: Demand And Supply Essay Research Paper Every
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