Affects of Supply and Demand on Business - Term Paper Example

The core intentions of any business venture are to supply the market with goods and services in theright quantities of demand; maximize profit and explore measures to necessitate growth and expansion. The process of growth and expansion is purely determined by the business’ performance over a given period of time; its ability to handle micro economic environment and match them with the macro economic factors, and the overall behavior and response of the market. Market forces on the other hand determine the quantity to be produced and supplied by manufacturers and retailers respectively, and depending with the industry that the firm is in, the overall business environment can be explicitly defined making the management to take the necessary course of action. Analysis of the market forces helps departmental decision making in that each and every section of the business optimizes resource allocation to minimize costs and maximize productivity in a bid to meet the demand in the market. Table of Contents Introduction Basic Laws and Principles of Demand and Supply Demand Side Supply Side Equilibrium Discussion Conclusion Works Cited Introduction Demand can be viewed as the quantity of goods and services that the market, consumers, is willing to purchase and consume within a given period of time and at a certain price. Demand varies from time to time due to rationality of the consumers; changes of preference and tastes, changes of their economic levels and statuses, and other market conditions such as changes of cost of production that influence price fluctuations. Supply on the other hand refers to the resource and or the quantity availed to the market by the producers within a given period of time dictated by the prevailing market conditions. Like demand, supply also varies with time depending on the climatic conditions, for seasonal commodities; cost of production in relation to the prevailing demand, micro and the macro factors within the producer’s environment and the general price and or performance of the economy. In a competitive market price determination is influenced by market forces, demand and supply, in that the firm determines what it will receive in exchange for its products and services; a factor of manufacturing costs, competition, market conditions and the quality of the product, and the buyers determine the quantity of the product/ service they are willing to purchase and consume at the price level presented by the suppliers/ producers (Brennan and Rowan 6-9; Nasrin 1-20). In monopolistic markets forces of demand and supply may not influence the price of the product/ service and vice versa thus in this paper we shall evaluate and analyze the effects of supply and demand on a business in a competitive market (Reuvid 2-6). Basic Laws and Principles of Demand and Supply To understand how demand and supply impacts on a business, we need to evaluate their market mechanisms in relation to price so as to understand how they influence actions of the business at given times within the production cycles, which can be analyzed by understanding the their interaction aspects. Whenever the demand increases but the supply remains the same or unchanged, there is shortage of goods and services in the market leading to a higher equilibrium price. Whenever demand decreases and the supply remain unchanged, there is surplus supply of goods and services which lead to lower equilibrium price. Whenever supply increases and demand remain unchanged, there is a surplus leading to a lower equilibrium price Whenever supply decreases and the demand is unchanged, there is a shortage of supply leading to a higher in equilibrium price Demand Side To understand how the demand of goods impact on a business venture we shall evaluate the demand schedule and relate it to the immediate decisions that the management make and the course of adjustments. As discussed earlier the demand of a given commodity will vary with time depending on factors such as price; changes of income, prices of substitute goods and changes of tastes and preferences, an so how do these affect the operations of the business? An increase in demand would mean that the firm increases its scale of operations to ensure increase of quantity output; which necessitates investment on capital and equipment and/ or increase of human capital if the firm is labor intensive. This increase of operations scale would translate to increase in marginal and total costs of the firm which are reflected in the pricing of the final product; to ensure the firm meets its costs and makes profit to ensure sustainability and development. For example, a decrease of demand due to speculative aspect that the price and/or quality will reduce/ improve in the future is short term and unstable; if the firms had followed the suit and reduced their scale of operations to cut the supply, the overall market will be affected in that when demand resumes its point the firms will not be able to meet it due to infrastructural inefficiencies which would lead to increase in price. There needs appropriate move by the manufacturers in understanding the market trends so as to adjust appropriately and maximize the opportunities of unpredictable changes of demand. Supply Side In perfectly competitive supply schedule represents the marginal cost of the business, that is, by evaluating how much additional output the firm can produce with respect to the market price the same unit of output will fetch in the market. The tradeoff between the quantity of the commodity to be produced and the anticipated prices influences the operations of the business in that if the price favors the profit maximization objective of the producer then there will be more produce. This would translate to increase in the scale of operations and vice versa if the tradeoff does not favor the producer which again is a factor of market demand which is not explicitly defined thus necessitating effective market research to help in optimal resource allocation. Competition in the market and the unpredictable variations of demand by the market calls for firms to work up for competitive advantage; innovations and incorporation of features and applications by producers/suppliers to their products and services to help them stand out from their competitors and capture the market share, which influences the factor inputs and course of action of the business in the long run. Equilibrium In perfect competition market equilibrium refers to price- quantity pair where the quantity supplied is equal to the quantity demanded at specific time and holding other factors constant. The state is voluntarily reached but firms need to conduct effective market research from the ground that market demand will in long term analysis influence the supply and thus need to be abreast with market information that will necessitate optimum resource allocation to maximize profits (Lowry and Greenhalgh 1-10). Discussion Market forces as discussed influences the operations and the aspiration of a business in that business as the supplier will have to consider the effects of its operations to the market and the resulting impact to the business. Businesses and firms need to evaluate the change in quantity demanded and the respective change in demand in that change in quantity demanded reflects a long term estimated and stable change of demand compared to an increase/ decrease of demand which can be short term and unstable (Charles, Francis, Morgan and Lauderdale 1-30). For instance, a change of population will have a long term effects on the overall demand compared to an increase or decrease of demand due to speculative aspects of the consumer on price and/ or changes of income and preferences, which is unstable and short term. Price as the determinant on the demand side would call for the producers to ensure effective pricing which will ensure they attract rather than drive the market away and still evaluate their relevance in a certain venture or pricing mechanism to ensure their sustainability (Robert, Llewellyn, Lauderdale and Pub 3-15). On the supply side business should adopt production techniques and mechanisms that give them competitive advantage over the rivals to ensure market share. This may involve increase in marginal and total costs but overall understanding of market forces will ensure a streamlined course of actions for growth and development as a unit and expansion/ diversification of its operations. Conclusion Market forces play an important role in shaping the operations and future of any given business venture in that demand will necessitate firms to organize and reorganize their scope of operations to meet the supply of the market which will guarantee the growth and diversifications aspects of the firm. Demand will primarily depend on the prevailing prices presented by the firms whereas supply will at times depend with the market price but with the majority of the businesses’ objective of growth and expansion, market demand will define their operations and depending with innovations and technology applied by firms pricing will favor both sides. Works Cited Brennan, Linda , and Rowan Barnes-Murphy. Supply and Demand. Mankato, MN: The Child's World, 2013. Print Charles Poirier, Francis Quinn, Morgan Swink and Lauderdale. Practical Sustainability : From Grounded Theory to Emerging Strategies. New York: Palgrave Macmillan. 2011. Lowry James and Greenhalgh Leonard. Minority Business Success: Refocusing on The American Dream. Stanford University Press, 2011, print Nasrin Khalili. Practical Sustainability : From Grounded Theory to Emerging Strategies. New York : Palgrave Macmillan. 2011 Reuvid Jonathan. Start up and Run Your Own Business : The Essential Guide to Planning, Funding and Growing Your New Enterprise. Philadelphia: Kogan Page Publishers, 2011, Print Robert Trent, Llewellyn Roberts, Lauderdale Fort and Pub Ross. Managing Global Supply and Risk : Best Practices, Concepts, and Strategies. Royal Arcade, Newcastle: J. Ross Publishing, 2010. Read More