The pricing and output decisions of any sort of business and the demand and quantity demanded of the entity being provided by the business go hand in hand. Both these sides of business equation are closely interlinked and interdependent on each other…
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On the manufacturers side of equation the pricing and output decisions are determined by the quantity demanded. Hence, we can assume with much use of common sense that an increase in the price of Coca Cola would eventually lead to a decrease in its quantity demanded. The same fact can be illustrated by the use of the demand curve that has a downward slope (Figure 1) which signifies that greater the increase in the price of the entity, lower will be the quantity demanded. In other words price and quantity demanded are inversely proportional (Management Study Guide, 2008).
The supply side of business also plays a major role in determining the output decisions. Supply decisions are primarily dependent on the profit potential. Building upon this factor we can verify that an increase in the market price of a product would lead to an increase in the supply of it in pursuit of a greater profit potential (Riley, 2006). This goes on to show that the supply of the products of a business is directly proportional to the price of the product (Case Karl E., 2009). The supply curve is hence upward sloping (Figure 1). There is however always a constraint in terms of the extent to which the business can expand its supply side as it either may be restricted by its scale of operations or the capacity or resources in the short run. Nevertheless, the business can expand its operations’ scale after having accumulated enough wealth in the long run (Harper, 2010). At anyone instant, the market can be subject to one of the following three conditions: Demand Excess (quantity demanded > quantity supplied at current price) Supply Excess (quantity supplied > quantity demanded at current price) Equilibrium (quantity demanded = quantity supplied at current market price) These three market conditions also play a major role in determining the output and pricing decisions of the business because if there an excess demand then there is a tendency for the price of the product to increase as the demanders would be in competition to gain the limited supplies. If however, the market conditions are on the excess supply side of equations then the prices are likely to decline. If there equilibrium in the market place then no price change would occur (Investopedia, 2011). Figure 1 SECTION B The basic forces of demand, supply and price fluctuations are the ones that govern the organizational responses in all sorts of businesses be it related to medicine, or farming, or production of shoes or computers. All the businesses play to their cards to these forces. The market is governed by the behaviour of both the producer and consumer sides of picture (Basic Economics, 2011). Having elaborated in section 1, we can now reasonably presume that a decrease in price is likely to increase the demand of the product. That is, if at the rate of making a call was 6$, a hypothetical person named Paul would call his mother in another town only once. But if the price if dropped to 3$ per call then Paul would be able to make double the amount of calls on the same price increasing the utility of it. On the other hand, one can take the example of a telecom company named Warid in Pakistan. Having noticed that the call rate at the night time was low and their profit margins were relatively less at that period of time, the company introduced a new ‘Glow’ package offering its customer base to make a call for 3 PKR per hour from 12AM to 7AM which would otherwise cost four times more without this offer (Warid, 2011). As a result of this,
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16th December 2011
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