StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Supply, Demand and Equilibrium Price - Essay Example

Cite this document
Summary
The three situations which Mrs. Acres can follow can be represented by the following economic analysis. The first choice that she has is to maintain the current production and to increase the prices for the excess supply to dampen. We can represent the above situation diagrammatically…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93.4% of users find it useful
Supply, Demand and Equilibrium Price
Read Text Preview

Extract of sample "Supply, Demand and Equilibrium Price"

"Mrs. Acres Pies and Economic Strategy" Module: The three situations which Mrs. Acres can follow can be represented by the following economic analysis. The first choice that she has is to maintain the current production and to increase the prices for the excess supply to dampen. We can represent the above situation diagrammatically. Case 1: Mrs. Acres increasing prices to meet demand The above diagram represents on way in which Mrs. Acres can act. Here, suppose the initial equilibrium occurs at the point where Demand meets Supply curve at D = S. The equilibrium quantity here is 8000 pies at a price of $4.5. However, Mrs. Acres find that this quantity is not meeting the current demand. She does nothing but allows the market forces to increase the prices. This way the market demand curve will move from D to D2. A new equilibrium will now be formed as consequence where Supply curve meets D2 curve. At this stage the quantity will be great than the initial equilibrium quantity demanded will be 8000 and the prices will be greater $4.5 depending on the strength of the market demand. Some of the increased demand will be absorbed by the increase in price and equilibrium quantity supplied to the market will remain 8000 pies. This will result in increase in revenue for Mrs. Acres and consequently the increase the profits. Therefore, Mrs. Acres will choose this option if other options are not yielding better results than this one in terms of profits and revenue. However, by choosing this option her position will be vulnerable in the long-run and she can expect to lose in the broad perspective. In the long-run, high prices will encourage competition to enter the market and take some of the market share by keeping prices lower than competitors. As a result of this, in the long-run, her quantity supplied will be less than 8000, as charging high price will result in market share being lost to consumers. Similarly, as a result her sales may also experience a negative trend and she may lose out in the long run by raising prices. In other words, after the initial gain of increased revenue followed by increased, prices she may end up inviting a lot of competition to the industry and may lose out in the long run. The price of the pies will decline and come back to the normal equilibrium price of $4.5. In the long-run, the equilibrium price and quantity will be different because new companies can enter the market, whereas in the short-run, no new firms can enter the market. As a result of this long-run effects of this will be different than short run effects. Case 2: Mrs. Acres decides to increase supply to meet additional demand Case 2: Mrs. Acres meets the Market Demand In this option suppose, the initial quantity is again 8000, represented by the label q1 on the diagram at a place where demand and supply meet. However, in order to meet the demand, Mr. Acres decides to increase the staff and in turn the supply. This will mean that there will be not increase in the price but the quantity demanded will now rise to q2, which is greater than 8000 pie. In the long-run, her sales and price will remain constant depending on the market trend and depending on the type of competition that exist in the market. However, since she is meeting demand there is no room for competitors to enter the market unless they come up with an extraordinary product. Therefore, by choosing this option she is discouraging the competition in the market which is going to keep her profits and revenues constant in the long run also and she may continue to enjoy the success in the long-run also. And the best thing here is that she will have to share profits with no one like she has to do in the option 3. Here, in the long-run, no new company can enter the market because there is no space in the market as Shelly Acres is operating under the efficient conditions of both allocative and productive efficiency as a result in the long-run, there will be no other effect and short-run conditions will prevail. If the same conditions in the market persist, in the long-run, her quantity supplied will remain 8000 pies and price will remain $4.5. In this strategy, there will be no difference in the short-run and long-run. In this case also, Mrs. Acres will find her revenue and profits increase. However, her decision to pursue option 1 or option 2 will be discussed after the third case has been discussed and a conclusion is reached. CASE 3: Mrs. Acres deciding to sell her pies through franchising If Mrs. Acres decides to pursue the third option, there will be a massive increase in the price of pies as the national restaurant chain now will also seek to add their profit margin to the price of pies. This will inflate the prices of the pies by a bigger amount than any of the other 2 options. However, this will also mean that the entire revenue will not only come to Shelly but there will be other parties who will be commanding this revenue such as the national restaurant chain as discussed above. In this case, in the short-run, her quantity demand will be equal to quantity supplied at a quantity of >8000. Her price will also be higher than $4.5 as there will be a share of national restaurant chain. This may increase the profits for Shelly but it is not guaranteed whether the quantity demanded of pies will decrease or not. Some of the increase in quantity demanded will be absorbed by the increase in the prices and the quantity demand may actually fall depending on the elasticity curve of these pies. However, in the long-run, her profits and quantity demanded is certain to fall because there will be more competition opening up and if they charge lower price than Shelley's pies and the demand for her pies is elastic than people will be attracted towards the consumers and in the long-run Shelley may suffer a lot. In other words, after an initial gain she may suffer in the long-run perspective. In the long-run, the prices will come down to the equilibrium price of $4.5 and quantity will come down to 8000 units. This will result in decrease in profits using this strategy when compared with profits earned in the short-run using the same strategy. If we compare the three options, we can safely say that all options are providing short term gains to Shelley Acres and therefore the final decision rests on how the business will be performing in the long run as a consequence of the type of strategy she decides to pursue. From the analysis done above, the best strategy is the strategy number 2, where Shelly Acres increases the supply to meet the additional demand that has popped up due to the popularity of her delicious pies. Not only this option will raise Shelley Acres revenue and profits in the short-run, but it will also make sure that her position in the long-run also remain constant and her business keeps growing with the threat of any competition and she continue to enjoy the smooth operation of the business. The long-run conditions in this strategy will be different because increase in prices will bring about more competition in the market and as a result Shelly Acres will lose her market share resulting in lower quantity of goods demanded and this low demand will also result in fall in prices of Shelley Acres products. This is how the long-run and short-run effects will be different in this (3) strategy. References Richard Lipsey and Alec Chrystal. Economics. 10th Edition. Oxford University Press 2003. Campbell McConnell and Stanly Brue. Economics. McGraw-Hill (2005) Robert Pindyck and Daniel Rubinfield. Microeconomics. Prentice Hall (2004) John Sloman. Economics. Prentice Hall (2005). Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Supply, Demand and Equilibrium Price Essay Example | Topics and Well Written Essays - 1000 words”, n.d.)
Supply, Demand and Equilibrium Price Essay Example | Topics and Well Written Essays - 1000 words. Retrieved from https://studentshare.org/macro-microeconomics/1505611-supply-demand-and-equilibrium-price
(Supply, Demand and Equilibrium Price Essay Example | Topics and Well Written Essays - 1000 Words)
Supply, Demand and Equilibrium Price Essay Example | Topics and Well Written Essays - 1000 Words. https://studentshare.org/macro-microeconomics/1505611-supply-demand-and-equilibrium-price.
“Supply, Demand and Equilibrium Price Essay Example | Topics and Well Written Essays - 1000 Words”, n.d. https://studentshare.org/macro-microeconomics/1505611-supply-demand-and-equilibrium-price.
  • Cited: 0 times

CHECK THESE SAMPLES OF Supply, Demand and Equilibrium Price

Supply and Demand

demand and supply curves at the state of equilibrium Discussion of the equilibrium price and quantity, and the effects of demand and supply shifts upon the equilibriums equilibrium price and quantity The demand and supply utilities pose equity in market when the quantity supplied equals the foregoing amount of demand.... shifts in the demand and supply curves and the point of equilibrium price elasticity of demand and supply Price elasticity of demand and supply suggests the natural course that the unit prices of commodities will either increase or decrease whenever the demand or supply increases or reduces respectively....
3 Pages (750 words) Essay

Fundamental Theories of Supply and Demand

nbsp; The fact is that Marshall's interpretation of demand and consumer surplus, or his reworking of either has led to a debate among economists.... To understand Marshall's conceptualization of the demand curve and consumer surplus, it is necessary to understand his theory of supply and demand and his classification of markets.... n explaining exchange value, Marshall considers demand and, ultimately, consumers' demand as important to the explanation....
13 Pages (3250 words) Essay

The Concept of Price Elasticity in Supply and Demand

hellip; In simple words, market equilibrium is related to demand and supply.... In order to understand the equilibrium situation in detail, let's first look at the meaning of the terms, demand and supply. Demand, simply, is a schedule or curve that shows the various amounts of a product that consumers are willing and able to buy at each of a series of possible prices during a specified period of time.... Market can be defined as an institution or mechanism that brings together buyers and sellers of a particular goods, services or resources in order to determine a price and set equilibrium at point where the plans of buyer meet the plans of the sellers....
11 Pages (2750 words) Essay

Supply, Demand and Equilibrium Price of Motor Vehicles

The paper "Supply, demand and equilibrium price of Motor Vehicles" demonstrates the correlation between the demand and supply of cars, their cost, price, the solvency of potential buyers, which in turn depends on many micro and macroeconomic factors.... upply and demand can be illustrated as curves on a graph and where the two curves merge is the equilibrium price and number; the equilibrium sets the benchmark towards which the market moves and if demand and supply swing then the equilibrium correspondingly changes....
1 Pages (250 words) Essay

Case- 2 Supply and demand: Markets, Prices and price setting

At this juncture, it is quite fairly being assumed that supply of the milk remains the same; the law of demand and supply of economics comes into play and cause milk prices to fall as producers would like to dispose off their milk before it is of no use.... With the increase in its demand, the milk price would go up in immediate terms.... The reason is that in the short span supply of milk cannot be increased; however, seeing the high price of milk many producers would try to increase its production so that they could exploit the market situation and earn higher revenue....
4 Pages (1000 words) Essay

Aggregate demand and aggregate supply

Real GDP refers to the total market values of the outputs measured in constant prices, but not Boyes, Melvin & Boyes (2008) stated that the value of real GDP is determined at the point where aggregate demand and aggregate supply curves intersect each others.... From the above example of aggregate demand and supply curves of Evergreen Land, both aggregate demand and aggregate supply curves intersect at the price level of 100, and this equilibrium point determines the value of real GDP....
3 Pages (750 words) Essay

Supply and Demand

Graph showing equilibrium price and quantity2.... However, there also exist incidents where change on the demand curve does not affect the supply curve (Krugman, Effects of Natural Calamity on demand and Supply World events, for instance, drought and floods, have affected demand and supply trends in free markets tremendously.... Whereas, that of supply argues that with an increase in supply, the price (P1) of commodity will significantly reduce....
1 Pages (250 words) Essay

Demand, Supply, and Equilibrium

The… demand and supply are the fundamental concepts used in economics.... The factors of demand and supply form the backbone of the market economy.... The factor of price is a reflection of the demand and supply in the market.... In the theories of market economy, the demand and supply theory is used to allocate the available resources in the best possible manner.... The existing relationship between quantity demanded and price is known as the demand relationship....
7 Pages (1750 words) Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us