Supply and Demand Essay -- Economy Economics Supply Demand Essays

Supply and Demand Every organisation which provides goods orservices to fee remunerative customers must, by its verynature, charge value for that good or service, topay for its costs, have retained profits forinvestments and to keep its sh beholders happy. Intheory, the trade price of whatsoever good or service isdetermined by the interaction of forces of claimand supply. There is an old saying, that ?if you canteach a parrot to say ?demand? and ?supply? youhave created a trained economist.?1 There is sometruth to this saying as intimately problems in theeconomics can be examined by applying the rulesof demand and supply. Therefore, the concepts ofdemand and supply can be claimed to be amongthe most important in economics. In order tounderstand either of them it is inevitable toexamine the factors that determine them. Although,a good?s price relative to other goods is probablythe most important factor influencing demand formost goods most of the time, there are otherfactors as well. These are disposable income, theprice of complimentary goods and substitutes,tastes and preferences, expectations, size ofpopulation, advertising. Suppliers on the otherhand are interested in making profits, and thusanything that affects profitability affects the supply.These include the price of other products, costs,technology and goals of firms. a) The price of anyproduct is determined by the interaction of theforces of demand and supply. The market price isset at the point, where demand equals supply,equilibrium. This can be seen from figure 1. Forthe purpose of this essay we will look at the pricesof beer. We can see that, the price is set at 1.65,where D intersects S. Fig. 1 The Penguindictionary of economics defines demand as ?thedesire for a particular good or service supportby the possession of the necessary means ofexchange to effect ownership?, while supply isdefined as? the quantity of a good or serviceavailable for sale at any given price?2. When aneconomist refe rs to the demand for a product hemeans effective demand, which may be defined as?the quantity of the commodity, which will bedemanded at any given price over some givenperiod of time.?3 However, the price of the goodor service varies according to the changes in eitherdemand or supply. In order to show that it isnecessary to... ...ng under?, if their shareholders are not satisfiedthey will sell shares and the company will bevulnerable to take-over bids. In conclusion, it canbe seen that the principles of demand and supplyhave a theoretical influence on price determination.The theory provides a useful and simple tool indetermining the price of a product by the means ofdemand and supply, an equilibrium price.However, the theoretic approach, uses manyassumptions, which limit the application of theoryto the real business environment. It is useful foracademic purposes, while it is difficult to reckonthat actual businesses will follow it in the businessplanning process. It is also diffi cult to use it as thetheory assumes the perfect market, which doesnot exist, with few exceptions, newsagents organismone of these. In other forms of competition firmswould base pricing decisions on expecteddecisions of their rivals (oligopoly), or woulddecide by themselves taking into account only their require (monopoly). Thus, it can be concluded thatcompanies would adopt their pricing policy on theenvironment they operate in, probably withouteven using the theory of demand and supply.