Supply and Demand

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...

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...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.