Business Economics - Assignment Example

Demand and supply of any product has a huge role in determining the equilibrium price and quantity that will be prevalent in the economy. This is determined by the intersection of the demand and the supply curves. This paper looks towards determining the manner in which a decision regarding the addition of a new service called home cooking service will have relevance on the buying decision and style of Semenyih. This looks towards evaluating the effect on the prices both on the short and long term through the use of graphs and will help to understand the manner in which the price and quantity gets affected due to it. Before moving on it is important to understand some of the key terms which are as Demand Curve: It is a curve which depicts the total amount of goods and services that the society on the whole is willing to purchase at every given prices. This makes the demand curve slope downward and has an inverse relationship with price (Demand Curve. 2011) Supply Curve: It is a curve which depicts the total amount of goods and services that the suppliers on the whole are willing to sell at every given prices. This makes the supply curve slope upward and has a direct relationship with price. Equilibrium: This is the point where the demand and the supply curve intersects and helps to determine the point where demand matches supply. Short Run: It is the period when all the factors except one factor which is used in the production of goods and services are fixed. Long Run: It is the period when all the factors which is used in the production of goods and services is variable Marginal Cost: It is the change in cost which has to be incurred when one additional product has to be manufactured Average Cost: It is the total cost divided by the total number of units that has been produced. Perfect Competition market structure is a form of market structure which has many sellers and many buyers. The seller has no control over the prices and the market determines the quantity and price thereby making the business earn normal profits. Further, perfect competition structure needs to distinguish their products and have to look towards some degree of differentiation to be able to ensure better sales. The present condition in Semenyih highlights equilibrium where the demand meets supply and helps to determine the equilibrium quantity and price. The present condition here is that the market is perfectly competitive i.e. the market forces determine the demand and supply for food at Semenyih. This makes the graph looks as (Docters, Schefers, Korman & Durman, 2008) The present situation in Semenyih appears as shown in the graph above where the intersection of the demand for food i.e. D and supply for food i.e. S determines the equilibrium quantity to be Q0 and the price to be P0. The market at this point is in equilibrium and demand meets supply. It is the point where AC = MC and helps to determine the point at which the business will be able to make profit. A change will be witnessed when a development of a new method or service through the development of home cooking service takes place. This will have an effect on the equilibrium in the short run as having a new service will make certain section of the society to move towards it. This will result in a decrease in demand for restaurants and will witness a growth in the demand for home cooking services (Shepherd, 2006). This will have an effect on the price as decrease demand would mean that the supply remains the same in the short run as the factors don’t change in the short run which thereby has an effect on the equilibrium. This has been highlighted below (Garg, 2010) The above graph highlights that in the short run only demand for restaurant decreases due to the availability of alternative i.e. home cooking services. This will make certain section of the society to bring a change in their preference and will look towards using home cooking services instead of restaurant. Since in the short run it is not possible to change the factors of production as a result of which the supply will remain the same. This is seen by the same demand graph D whereas the supply has decreased from S to S1. This has resulted in a change in equilibrium quantity from Eq1 to Eq2 and the increase in equilibrium price from P0 to P1. It is the point where AC = MC and helps to determine the point at which the business will be able to make profit. The degree of magnitude depends on the change in demand i.e. the amount of consumers who have shifted from restaurant to home cooking services (Mayerhoefer & Zuvekas, 2008). This has affected the overall mechanism in which the economy works and will have an effect on the overall demand and supply that is prevalent in the economy. The change towards home cooking services has happened due to different factors which has brought about a change in demand and is as (Colell, Winston, Michael & Jerry, 1995) Change in Price: A change in price results in a change in change in demand as at a high price customers demand less of the product and vice versa Change in Income: A change in income also has an effect on the demand as an increase in income results in an increase in demand for the product and vice versa Change in taste & preference: A change in taste and preference has an effect on the demand as a preference towards a particular product increases the demand for that particular product and vice versa Change in price of other product: A change in the price of other product especially complimentary and substitute product affects the demand for a particular product as a increase in price of supplementary products increases the demand for its substitute product but decreases the demand for complimentary products and vice versa. This situation is prevalent in the short run but over a longer period of time a lot of changes are witnessed as all factors become variable due to which changes are seen in the supply. This has an effect on the equilibrium quantity and equilibrium price which thereby ensures that price increases and a balance is maintained between supply and demand. This thereby ensures that over a longer period of time the graph is demonstrated as below (Garg, 2010) The above graph which is a continuation from the graph of the short sun shows that certain manufacturers which were producing goods in the short run stopped producing the good and services. This resulted in a decrease is supply curve which is witnessed by a shift in the supply curve from S1 to S2. The demand already has decreased as seen from the D2 curve which has moved from the original D1 curve. This has thereby resulted in a change in equilibrium quantity and equilibrium price. The above graph also highlights that the decrease in equilibrium price is less than the decrease in equilibrium price as seen in case of the short run. The graph for the long run thereby helps to bring forward the different dimension and mechanism through which the change in the factor of production results in a change in supply of goods and services. This will thereby have an effect on the price and quantity demanded through which changes will be witnessed in the manner in which equilibrium is achieved (Quantity demanded, 2011). The changes that the different factors results in changes in the demand and supply over a longer period of time can be attributed towards different factors like change in income or change in preference or change in disposable income or so on. The above situation highlights that being able to develop a strategy will have an effect on the equilibrium quantity and equilibrium demand (Demand, 2011). Thus, the situation of Semenyih highlights the manner in which changes in the preference of customers home cooking services instead of restaurant have an effect on the price of food charged by the restaurant both in the short and the long run. It shows that the equilibrium quantity and price both decreases due to change in preference and the shift is larger in the short run as the suppliers are not able to reduce the production because of the fact that most factors of production are fixed. In the long run the situation changes as the factors of production becomes variable which results in the decrease is supply due to which the change in equilibrium price and quantity is less. Thus, the change in the preference of consumer has an effect on the overall demand for goods and services which has an effect on the performance of the economy both in the short and long period of time thereby resulting in a different curve which determines the equilibrium that will be determined in the market. References Colell, M., Winston, A., Michael, D. & Jerry, R. 1995. Microeconomic Theory. 3r Edition, New York, Oxford University Press, Pearson Education Demand Curve. 2011. The Demand Curve. Retrived on December 4, 2012 from http://www.netmba.com/econ/micro/demand/curve/ Docters, R., Schefers, B., Korman, T. & Durman, C. 2008. The neglected demand curve: how to build one and benefit. Journal of Business Strategy, Volume 25, issue 5, pp. 19-25 Demand. 2011. Factors affecting Demand. Retrived on December 4, 2012 from http://www.economicshelp.org/microessays/equilibrium/demand.html Garg, S. 2010. Microeconomics: Introductory. 7th edition, pp 3.11-9.17, Dhanpat Rai Publication Mayerhoefer, C. & Zuvekas, S. 2008. The shape of demand: what does it tell us about direct to consumer marketing. The B.E. Journal of Economic Analysis & Policy, Volume 18, Issue 2, pp. 4-8 Shepherd, G. 2006. Vertical & Horizontal Shifts in demand curve. The Econometric Society, Volume 4, No. 4, pp. 361-367 Quantity demanded. 2011. Demand. Retrived on December 4, 2012 from http://www.cliffsnotes.com/study_guide/Demand.topicArticleId-9789,articleId-9728.html Read More