Background Information on Supply & Demand
Background Information on Supply & Demand
Market attractiveness can be characterized by the interactions between inner motivations of buyers and manufacturers, as well as price and quantity for a product determined by the external market forces. Basically, the price reflects and channels the motives and desires of the potential consumers. Supply and demand are considered the fundamental principles of the market economy. Demand explains the necessary amount of a product desired by consumers. Supply represents the volumes of production the market can handle. The balance between price and volumes of production is known as the supply relationship. Meanwhile, price is a reflection of supply and demand. Thus, the relationship between demand and supply represents external and internal forces behind the allocation of the required resources in the most efficient way.
For example, lactose intolerance reduced the value of dairy products by switching to the soya-based beverages. In this case, if supply is higher than demand, there are diary lockers full of unsold products. Thus, a surplus of products puts downward pressure on its price, and the suppliers have to cut the price until the sales rates are increased to the required level. The producers can either reduce the production volumes or shift the resources to the production of new product substitutes. Whatever it takes, the surplus quantity of those products will be eliminated from the market for the simple reason that consumers are not intending to buy that quantity of dairy products at the price suppliers wanted for it (Graham, 2016).
Economic markets tend toward equilibrium, namely, the price and quantity that refer to the point where supply and demand closely interact. Nevertheless, the equilibrium itself can be amended, as any changes that can influence the demand or supply indicators automatically establish a new equilibrium. Thus, in case with dairy products, there is going to be a reduction of production.
General shifts in demand or supply can influence the equilibrium both positively and negatively. An increase in demand raises the quantity required at a given price. This causes a new, higher market price, so producers have to supply that higher quantity at that higher market price. This allows establishing a new equilibrium point that is lower than the previous one. When the price moves downward, the excess supply will appear for the two following reasons:
• The market demand goes downward increasing the quantity demanded.
• The market supply goes downward decreasing the quantity supplied.
The quantity demanded goes upward when the quantity supplied downward, so the gap between them becomes smaller. The price continues to drop until the excess supply is eliminated. Thus, the management sometimes creates an excess supply of its goods by setting a price floor, namely, a minimum price. If it is greater than the equilibrium price, it can cause a permanent excess supply which will have negative impacts on annual revenues.
A manufacturer can also shift its resources to the increase of production of the soya-based beverages, as an alternative to the lactose products characterized by the decreased demand in the market. The sellers can raise the price of the new products along with the production volumes (O’Sullivan, 2016).
References
Graham, R., J. (2016). How to determine price when supply or demand curves shift. Retrieved July 18, 2016 from http://www.dummies.com/how-to/content/how-to-determine-price-when-supply-or-demand-curve.html
O’Sullivan, A. (2008). Economics: Principles, Applications, and Tools. Retrieved July 18, 2016 from https://www.pearsonhighered.com/poetool/pdf/O'Sullivan%207e%20C04.pdf
Spaulding, W., C. (2016). Supply-Demand market equilibrium. Retrieved July 18, 2016 from http://thismatter.com/economics/market-equilibrium.htm
