Importance of Supply, Demand and Market Equilibrium for an Organisation

Question: Evaluate the importance of supply, demand and market equilibrium for an organisation when decision-making within its wider economic context.

Introduction:

In this modern era, it is extremely vital to be able to take quick and correct action than ever before because things change overnight in the markets. Accordingly, it is believed that understanding the supply, demand, and market equilibrium, one of the main tools in a competitive market, play a key role in an organisation.  An organisation needs to make decisions about, what to produce; how to produce and who are the end-users consume their products or services. Thus, this essay analyses the importance of the supply, demand and market equilibrium with a broad economic perspective for an organisation to make wiser decisions to become successful in a competitive market. Firstly, this essay discusses the determinants of supply and evaluates their uses in the profit maximisation process. Secondly, the essay analyses the determinants of demand with respect to their applicability in organisational decision-making process. Finally, it evaluates the importance of the concept, market equilibrium, for the wellbeing of an organisation.

Body paragraph 1:

Topic Sentence: There are several factors affecting the economic supply and organisations have to be keen against them in order to ensure profit-maximization.

Supporting Points:

• Many economists mentioned that there are four determinants of the quantity supplied.
• Chrystal and Lipsey in their book “Economics for Business and Management” state that “there are four major determinants of the quantity supplied in a particular market” (Chrystal & Lipsey 1997, pp. 60-61) namely, Price, Input Prices, Technology and Expectations (1997).
• Modern day economic practitioners explains that, apart from price, there are few other factors affecting the economic supply namely, the number of vendors in a market, production technology, expenses of the inputs for the production, the amount of government intervention to the market in terms of regulations, subsidies or taxes, the price of possible substitutes and the future price expectations among producers (Khan Academy 2019)
• Producers have to minimise the price of the factors of production such as land, labour, capital and materials while including modern technology to the production (Eastin & Arbogast 2011, p. 9).
• According to the Herbert Simon, a pioneer in organisational behaviour theory states that:

Most producers are employees of firms, not owners. Viewed from the vantage point of classical theory, they have no reason to maximise the profits of the firms, except to the extent that they can be controlled by owners (Simon 1991).

• As an alternative, managers use mark-up pricing as a replacement to the rule of keeping marginal revenue equally to marginal cost, because of its practical difficulties (McAleese 1997).
• In some industries, supply can be varying seasonally which leads to increase of supply without increasing the prise which is challenging (John 2017).
• Though there is a theory saying that, higher prices leads to more supply and lower prices leads to less supply, it is not the case for every time because of the non-price determinants (Khan Academy 2019)

Body paragraph 2:

A demand of a product is influenced by many factors and being able to analyse those factors will help the organisations to make better business decisions. According to the law of demand, if all other factors being equal, the demand will be reduced, when the price of a product is raised (Fraser, Gionea & Fraser 2004). However, that basic economic hypothesis does not exist in a real market environment. It has been explained that five major determinants influenced demand (Chrystal & Lipsey 1997, p. 48). Apart from the price, there are several non-price determinants namely income, the price of related goods such as substitutes and complementary goods or services, seasonal conditions, expectations, population and tastes, and preferences. It is believed ‘income’ considered as the most important determinant (Blanchard 2019). Generally, consumers tend to spend more if they earn more and vice versa. The income-demand relationship categorises into four types namely, essential consumer goods, inferior goods, normal goods, and luxury goods. Consumers’ basic needs or essential consumer goods give a positive relationship between income and demand up to a certain level and after some level it keeps constant. Normal goods such as clothes, vehicles and luxury goods such as expensive jewellery have positive relationships with demand while inferior goods maintain a negative relationship. Therefore as an organisation, it is vital to have a better understanding of the affordability level of their consumers. Similarly, other non-price determinants like tastes and preferences, the price of related goods maintain a negative relationship with the demand while population and advertisements maintain positive. The factors such as seasonal conditions, expectations and government policies maintain the relationship with demand depending on the situation where organisations need to have proper market surveys to become successful (McAleese 1997). Finally, understanding the determinants of demand is important for business as it helps to take a decision to invest in expanded production or to conduct a marketing campaign and for pricing the goods or services. 

Body paragraph 3:

Topic Sentence: Understanding the market equilibrium leads to correct decisions for an organisation.

Supporting Points:

• The reaction to the price differs from consumers to producers.
• According to the economic theories, there is a single price in a free market which brings demand and supply into balance, called equilibrium price (Khan Academy 2019).
• Equilibrium price is also called a market clearing price which is an important concept for an organisation as there will be nothing remain (Fraser, Gionea & Fraser 2004).
• Disequilibrium and excess demand which is shortage results due to the price drop below the equilibrium level.
• Sometimes, the shifts of demand or supply curves create a new equilibrium position with a new equilibrium price and quantity (Fraser, Gionea & Fraser 2004).
• There are man-made factors affect the markets such as planned economies by governments like price controls (Kramer, 2018) and organisations have to go for advanced economics tools to address them.  

501 words (introduction, topic sentences, 1 body paragraph and excluding in–text references)

Reference List

• Blanchard, S 2019, ‘The Most Important Determinant of the Demand of a Good’, Small Business – Chron.com, viewed 2 February 2019, <http://smallbusiness.chron.com/important-determinant-demand-good-80376.html>.
• Chrystal, KA & Lipsey, RG 1997, Economics for Business and Management, Oxford University Press, New York.
• Eastin, RV & Arbogast, GL 2011, Demand and Supply Analysis: Introduction, CFA Institute, viewed 2 February 2019, < https://www.cfainstitute.org/-/media/documents/support/programs/cfa/prerequisite-economics-material-demand-and-supply-analysis-intro.ashx>.
• Fraser, I, Gionea, J & Fraser, S 2004, Economics For Business, McGraw-Hill Education, Australia.
• Khan Academy 2019, ‘Market equilibrium’, viewed 1 February 2019, <https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/market-equilibrium-tutorial/a/market-equilibrium>.
• Khan Academy 2019, ‘Lesson summary: Supply and its determinants’, viewed 30 January 2019, <https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/basic-economics-concepts-macro/supply/a/lesson-overview-supply-and-its-determinants>.
• Kramer, L 2018, ‘How Does the Law of Supply and Demand Affect Prices?’, viewed 30 January 2019, < https://www.investopedia.com/ask/answers/033115/how-does-law-supply-and-demand-affect-prices.asp>.
• Lister, J 2017, ‘Why Are Supply & Demand Important to a Business?’, viewed 2 February 2019, <https://bizfluent.com/info-7796162-supply-demand-important-business.html>.
• McAleese, D 1997, Economics for Business, Prentice Hall Europe, Great Britain.
• Simson, HA 1991, ‘Organisations and markets’, Journal of Economic perspectives, Vol. 5, No. 2,pp. 25-44, viewed 2 February 2019, <http://www.jstor.org/stable/1942684>.