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Supply, Demand and Equilibrium Price - Essay Example

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The three situations which Mrs. Acres can follow can be represented by the following economic analysis. The first choice that she has is to maintain the current production and to increase the prices for the excess supply to dampen. We can represent the above situation diagrammatically…
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Supply, Demand and Equilibrium Price
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Supply, Demand and Equilibrium Price

Download file to see previous pages... She does nothing but allows the market forces to increase the prices. This way the market demand curve will move from D to D2. A new equilibrium will now be formed as consequence where Supply curve meets D2 curve. At this stage the quantity will be great than the initial equilibrium quantity demanded will be 8000 and the prices will be greater $4.5 depending on the strength of the market demand. Some of the increased demand will be absorbed by the increase in price and equilibrium quantity supplied to the market will remain 8000 pies. This will result in increase in revenue for Mrs. Acres and consequently the increase the profits. Therefore, Mrs. Acres will choose this option if other options are not yielding better results than this one in terms of profits and revenue. However, by choosing this option her position will be vulnerable in the long-run and she can expect to lose in the broad perspective. In the long-run, high prices will encourage competition to enter the market and take some of the market share by keeping prices lower than competitors. As a result of this, in the long-run, her quantity supplied will be less than 8000, as charging high price will result in market share being lost to consumers. Similarly, as a result her sales may also experience a negative trend and she may lose out in the long run by raising prices. In other words, after the initial gain of increased revenue followed by increased, prices she may end up inviting a lot of competition to the industry and may lose out in the long run. The price of the pies will decline and come back to the normal equilibrium price of $4.5. In the long-run, the equilibrium price and quantity will be different because new companies can enter the market, whereas in the short-run, no new firms can enter the market. As a result of this long-run effects of this will be different than short run effects.

Case 2: Mrs. Acres decides to increase supply to meet additional demand

Case 2: Mrs. Acres meets the Market Demand
In this option suppose, the initial quantity is again 8000, represented by the label q1 on the diagram at a place where demand and supply meet. However, in order to meet the demand, Mr. Acres decides to increase the staff and in turn the supply. This will mean that there will be not increase in the price but the quantity demanded will now rise to q2, which is greater than 8000 pie. In the long-run, her sales and price will remain constant depending on the market trend and depending on the type of competition that exist in the market. However, since she is meeting demand there is no room for competitors to enter the market unless they come up with an extraordinary product. Therefore, by choosing this option she is discouraging the competition in the market which is going to keep her profits and revenues constant in the long run also and she may continue to enjoy the success in the long-run also. And the best thing here is that she will have to share profits with no one like she has to do in the option 3. Here, in the long-run, no new company can enter the market because there is no space in the market as Shelly Acres is operating under the efficient conditions of both allocative and productive efficiency as a result in the long-run, there will be no other effect and short-run conditions will prevail. If the ...Download file to see next pagesRead More
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