Classical Economists and the Limitations of Demand and Supply Curves
Most classical economist often discuses demand, supply and price using relatively static interacting models. In other words the demand and supply curves utilized often depict price being the main determinant of demand and supply. However, there is no serious data and information that is provided in this analysis on determining how the level of equilibrium is in most cases attained under such cases. The dramatics involved like the equilibrium are not well explained and determined by classical economists. Further classical economists do not effectively explain the overall impacts that emanate from inadequate or excess goods. Important to note is that in the world it is clear that there is a strong impact of inventory of goods kept by producers on the overall market pricing levels (Edward, 2014).
The rate at which producers offer goods to the market has a minimal influence on the market price though most classical economists think it is the main determinant. In situations where the level of goods and services offered by producers is equivalent to the total demand of consumers, it is assumed that by the classical economists that the market equilibrium is effectively attained (Fleetwood, 2014). Therefore in this paper an effective model which brings both real word and classical assumptions will be effectively discussed. This will aid in the explanation of the relationship between price, demand and supply vital in analyzing business strategies and tactics by managers at all levels.
Demand is defined as the ability and willingness of consumers to buy a given product at a specific time. According to economic theory, the concept of demand comprises of mainly two aspects and they include ability and taste to buy. In other words taste is defined as the overall desire for a specific or particular commodity (Gresty, 2008). Therefore taste is the main determinant of the willingness of consumers to purchase a particular product in a given time at a given price(Metz & Bartley, 2013). Ability is defined by economists as the overall financial muscle possesses by consumers interested in a given product (HALÍ?, 2012). Therefore there is a possibility of the willingness not being backed by the ability and the ability not being backed by willingness making demand as one of the interesting topics in the field of managerial economics. It should be noted that market prices are the main determinant of the consumer’s ability and willingness. In other words where there are high market prices for a particular product, the levels of demand will automatically be low and in cases of low prices being experienced, the demand is always low and vice versa. Consumers often purchase a lot of products when the prices of goods and services are generally affordable. Here the dilemma is that only a few individuals may a lot of particular service or good. An extra increment of particular service or good results into diminishing marginal utility and thus little satisfaction is attained. Hence forth taste is one of the limitation of the demand of a given product or service when it at favourable price. Few items may be purchased by that same amount of money when the price rises. The level of demand reduces as the pricing levels increases due to the limited ability though there may be desire.
Understanding Demand: Ability, Willingness, and Taste
The above simple demand curve implies that demand is affected by only pricing which in the real world is not possible. Basing on the economic assumptions that demand is affected by other factors. The above factors are deemed to be stable or static over the period where demand and supply become stable (Metz & Bartley,2013).The seller’s actions are usually determined by demand. In other words it is the overall willingness and ability of the consumers to afford a particular product at a given period of time regardless of the prices available in the market. When there are high prices in the market much of the commodity is supplied. Any profit maximizing producer would prefer to sell at a high price for purposes of attaining higher levels of income. Higher prices enable consumers to cover the costs of production and at the same time generate enough profits from the sale of goods and services to various consumers. In the real world market place producer offer raise the price when there is scarcity in the market. Scarcity in the market is brought about by limited, supply breakdowns and others (Mesly, 2017). The levels of costs incurred by the producer rise due to the short supply increase. The above impact is similar when there is a bumper supply in the market. When there are high levels of supply producers are forced to lower down there prices for purposes of attracting customers. The supply curves presented by the classical economists effectively explain the complex processes involved in supply.
As indicated in the figure below, a high price creates incentives to producers to increase the overall levels of production which leads to high supply in the market.
Demand is generally defined as the total amount of goods and services consumers are willing and able to buy at a specific time holding other factors kept constant. On the other hand supply refers to the total amount of commodity producers are willing to put on market at a given time. Price changes bright about a different reaction between both sellers and buyers ( Tshilidzi and Evan, 2017). When there is a price increase, producers are forced to supply more goods on market in order to enjoy higher profits and on the other hand, an increase in price reduces the purchasing power of consumers reducing there willingness and ability. It should be noted that the concept of demand and supply are directly related. In other words the consumers enjoyment affects the producer and vice verser. Therefore it is difficult to harmonize the two and bring about a zero sum game as explained in the field of managerial economics
The Role of Price in Determining Demand
Supply and demand systematic dynamics approach
The classical economists offer a demand and supply model which provides an overview of a single product equilibrium market. According to economists demand and supply are both determined by the level of pricing. The level of equilibrium explains demand and supply curve intersections but not the process that brings about the intersection between the two. The aspect of system dynamics considers product availability other than the production rate impacts the demand and the overall market price. Meaning that product inventory is among the core determinants in regulating demand and price setting. The above model is regarded as a hybrid of the two schools of economic thought since it brings about the dynamic impacts of inventory towards a model replicating the static economists demand and supply explanation. To effectively understand market behavior three major aspects will be studied and they include; price, demand and supply.
One simple rule is being effectively obeyed by demand in the above model. In other words as effectively dictate by pricing schedule it is the demand. The amount of a commodity consumers are willing to purchase at a specific price is indicating by the price schedule demand. In other words two aspects are directly impacted by the level of demand and they include inventory stock outflow and the price of the desired inventory needed by suppliers (Jacqui, 2012).
Supply
The model supply sector is effectively explained in the figure below. For purposes of model simplification, all suppliers’ inventories were combined to form a single large inventory. The total production of goods to inventory in this case is represented by supply inflow. Also shipment which is outflow of the stock is equivalent to the overall demand (Pettinger, 2011).
The aspect of demand analysis is critically significant in a number of aspects such as aiding in the development of the analysis frame work for explaining prices, deterring product prices, forecasting among others (Brownell etal.,2009). The overall revenue enjoyed by the firm is determined by price and output thus making pricing an important aspect in the field of managerial economics. Elasticity’s of demand such as durable versus perishable, producer versus consumer goods, individual market demands , elasticity’s and there revenues amplifications among others The summation of the demand curve of all individuals provides the overall demand curve for a group of consumers or a market. To achieve this all output demanded at the different prices levels are totalled up (Robert,2002).
Supply and its Reaction to Price Changes
It should be noted that elasticity of demand is generally termed as the degree of responsiveness of the level of output demanded as price changes. In modern business, there exists various price elasticity’s which are critically relevant. More importantly, various products are associated with different price elasticity which has a greater impact on the level of pricing decisions undertaken by management. In managerial economics, the demand curve provides an illustration of various goods and there demand. Elasticity is termed unit elastic incase it equals to one (De Rassenfosse e tal.,2012). Meaning that any slight increase or decrease in price leads to a change in the total quantity demanded. It is also relatively elastic if it is in between 0 and 1. In other words huge increases or decreases in price have marginal or minor effects in the quantity demanded. Elasticity is termed as perfectly elastic if it is equal to 0. In other words price changes have no effect on the total quantitative demanded. Where elasticity is between 0 and infinity, the commodity is referred to as relatively elastic. Where a small change in prices leads to large impact on the quantity demanded, the commodity is termed as perfectly elastic (Dunne etal.,2009). To managers the concept of price elasticity of demand strongly impacts most business decisions undertaken in modern business(Lester and Houthakker,2010). The assumptions of price elasticity guide pricing decagons carried out by managers. The extent at which prices of certain goods can be increased or decreased is derived from the concept of elasticity. Elastic commodities are exteremenly affected by a price change compared to the inelastic items. Therefore managers tend to increase prices of inelastic goods and are reluctant to increase prices of elastic goods due to the likely negative impacts. Managerial economist engages in the computation of various elasticity such as the income elasticity of demand, price elasticity of demand and the price elasticity of supply. Therefore elasticity is generally explained basing on variations in revenues given that it is the main goal of CEO’S, marketers and managers (Dunne etal.,2009). Managers are more concerned of the impacts in price increases of services and goods, therefore Managers are in most cases attracted to increase prices as a way of raising the overall profit levels of the organization. Prices can only be increased where the demand curve is said to be elastic in demand. Under here there will be a raise in the total revenues when the price level is increased(Gwartney etal.,2010)
The Relationship Between Demand and Supply
However, the overall costs incurred by the business are likely not to rise. Given that profits are obtained by subtracting total costs, there is likelihood that price increases will lead to more revenues or profits where demand is inelastic compared to when it is elastic. Further, the demand curve can only be inelastic or elastic but not both. The importance of the item in the consumer’s budget coupled with urgency of need and substitute’s availability affects the elasticity of demand. It should be noted that substitutes are referred to as products which provide a consumer with various choices to select from (Sabatelli, 2016).
This paper establishes the concept of demand, supply and elasticity and there relevance and understanding in modern markets and business. It focuses on the supply and demand concepts, principles and ideas employed in modern business management and their contributions to the sustainability of organizations to maintain a competitive advantage. The study analyses different published articles and peer reviewed journals in the field of supply, demand and elasticity .It is a literature review based study and therefore acknowledges the research methods used in the reviewed research papers. Most of the reviewed publications in this paper used the questionnaire method to obtain a quantitative account of attitudes and ideas of the targeted population (Anastasia, 2015). The research thoroughly and comprehensively reviewed the available literature and databases to obtain information that is relevant for the topics of demand, supply and elasticity and their overall relevance in the field of modern business management (Kendig e tal., 2014).
The four main articles include: Fleetwood, S. (2014). “Do labour supply and demand curves exist?”. Cambridge Journal of Economics. 38 (5): 1087–113. doi:10.1093/cje/beu003.Edward,O.(2014).Modelling the Demand and Supply Determinants of Australian Wine Grapes.Wiley Online Library.Retrieved from https://doi.org/10.1111/1759-3441.12069, Robert,W.(2002).the supply and demand of economic history: recent trends in the journal of economic history.volume 62, issue 2 , pp. 524-532.Retrieved from https://doi.org/10.1017/S0022050702000591. and Marwala, Tshilidzi; Hurwitz, Evan. (2017). Artificial Intelligence and Economic Theory: Skynet in the Market. London: Springer. ISBN 978-3-319-66104-9.
Results and Analysis
The findings point out the significance of the relationship between demand, supply and elasticity in modern business management. All decisions undertaken in the day to running of the business base on demand analysis and supply to determine which one is more profitable or which one is good for business sustainability both in the short and long run period. This aids in the development, communicating and implementation of the objectives of a business. There is a positive impact on the performance of the business when there is a good understanding of the concepts of elasticity, demand and supply. The concept of elasticity aids in pricing and production choices. Managers are able to identify which products is more or little price sensitive and charge price according. Therefore managers who have a firm understanding of the concepts of price elasticity of demand undertake production and pricing choices which offers a competitive advantage in the market place thus generating profits to the organizations. Lack of understanding of the supply and demand dynamics is in most cases related with low sales and profits which hinders the level of organization sustainability in a highly complex and competitive environment. Without the knowledge of such concepts managers may fail in their production and pricing decisions which are very important in business survival. Therefore this explains why some business doesn’t live to celebrate even their first year while others have been in operation for various years. All this relates to understanding of pricing and production choices which bases on knowing the market dynamics (Dunne etal.,2009).
The Systematic Dynamics Approach to Demand and Supply
Conclusion
From the results of the various research papers reviewed, there is a great impact of the concepts of demand, supply and elasticity towards the performance of businesses and organization. A business that seeks to have a good financial performance utilizes and at the same time effectively understands the concepts of demand, supply and elasticity in there day to day running. Managers that aim at promoting sustainability invest a lot of resources to effectively understand the demand and supply patterns before making any pricing or production decision. Therefore sustainable performance is brought about by a good a competitive advantage which arises from developing effective pricing and production strategies which are better than those of the competitors in the market. Therefore with better strategic choices, there are improved employees’ attitudes towards the business objectives thus leading to high level of productivity. It is observed that in order for the employees to appreciate the inputs into valuable outputs appreciated in the market, there should be a clear understanding of the market dynamics in order to strategies them to meet the needs of the market in a strategic manner.
This paper clearly concludes that there is a significant impact of the concepts of demand, supply and elasticity the performance of a business; whether at the start-up stage or mature stage of the business. Therefore, for the business to perform favourable in the competitive market, good leadership that clearly understands the market dynamics is critically important. Also both classical and modern economic thoughts of understanding and analysis of the concepts of demand and supply need to be effectively considered by managers while making production and pricing choices. This is important in getting a clear understanding of the features of the market and how possible they can be penetrated to meet the goals and objectives of the business. It should be noted that firms pursue various objectives such as profit maximization, sales maximization, large market share and long run survival. Managers pursuing any of the above objectives needs to first effectively understand the concepts of demand, supply and elasticity before making any production, pricing and expansion choices for purposes of ensuring sustainability of the business strategic goals and objectives as comprehensively and effectively discussed above.
References
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