Supply and Demand Essay -- Economy Economics Supply Demand Essays

Supply and Demand 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... ...ng 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.