Mechanics of Supply and Demand Managerial Economics

Mechanics of Supply and Demand Managerial Economics

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Why is it important for managers to understand the mechanics of supply and demand both in the short run and the long run?  Give examples of companies whose business was either helped or hurt by changes in supply or demand in the market in which they are competing.

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Hi, thanksfor feedbacks1.Supply and Demand is an essential factor in the economy. According to Keat et al. (2013), Demand is several goods or services that consumers want to buy at different prices; Supply is the quantities of goods or services that people sell for various prices in a period. Many factors can affect supply and Demand, for example, a Pandemic. A company’s financial performance rises when it enhances the relative importance of versatility and reduces the relative importance of decreases in supply levels and purchasing rates in its supply method (González-Benito,. 2010). Managers that understand the function of Supply and Demand both in the long and short-run help in decision-making processes to enhance business performance. Many factors affect Supply and Demand, for example, Costs and Technology, prices of goods and services, future expectations, amount of sellers, and weather conditions; these are known as nonprice determinants (Keat et al., 2013). Nonprice determinants affect the market’s equilibrium; understanding the mechanics of Supply and Demand helps managers make decisions(Keat et al., 2013).One example of a company hurt by Supply and Demand is Apple, the big tech company. The tech giant released terrible news saying that it will not meet the revenue expected in the first quarter(2020). The pandemic has affected the tech giant’s production and sales in China. Apple’s Supply is affected by the production lines workers not returning to work from being sick as quickly as they thought (2020). Another example of an organization being affected by Supply and Demand is Tesla. According to Krisher (2019, Jan 04), Tesla made more vehicles than it did the previous year and has to come up with a solution to either sell more or slow down on production. Tesla found that if they do not slow down on production, they can reduce their prices on three of their models.Coronavirus hits global iPhone supplies, Apple revenue: CORONAVIRUS ECONOMY. (2020, Feb 18). EFE News Service https://0634jhvj2-mp03-y-https-www-proquest-com.pr…González-Benito, J. (2010). Supply strategy and business performance: An analysis based on the relative importance assigned to generic competitive objectives.International Journal of Operations & Production Management, 30(8), 774-797. http://0634jh2ek.mp01.y.http.dx.doi.org.prx-keiser.lirn.net/10.1108/01443571011068162Keat, P. G., Y., Y. P. K., & Erfle, S. E. (2013). Managerial Economics: Economic Tools for Krisher, T. (2019, Jan 04). Tesla price cuts hint at shift in supply-demand dynamic: Automaker’s move to slash costs on its three models is latest sign changes may be coming. The Globe and Mail https://0634jhvj2-mp03-y-https-www-proquest-com.prx-keiser.lirn.net/newspapers/tesla-price-cuts-hint-at-shift-supply-demand/docview/2162934276/se-2?accountid=357962. It’s very important for managers to understand the mechanics of supply and demand. Failure to understand these concepts may lead to a loss—either in opportunity or outright financial loss. Our textbook describes situations where supply and demand reach equilibrium. This is where the amount of demand for a product meets the amount of supply. However, we find that if the price is too high, demand might drop and you may be left with a surplus. Likewise, if the price is too cheap, you may find yourself with a shortage. A shortage is not ideal because you are missing out on potential sales and a surplus is a problem because you have spend capital to produce products, but they are just sitting in a warehouse. Theoretically, the price of the product should be adjusted until equilibrium is reached, however, there are many other factors at play that may interact or interfere with the market (Keat et al., 2013).

We’re seeing an excellent real-world example unfolding around us. The continuing COVID-19 pandemic has led to significant shortages of essential silicon microchips. We’re seeing companies like Samsung and Toyota fail to meet their quotas and/or seeing sharp decreases in sales due to inability to produce enough supply to meet the increased demand (MarketLine, 2021).This decreased supply of silicon is leading to “scalping” where second-hand sellers will sell the products at a considerable mark-up. We’re seeing this in multiple areas—used cars, xbox and playstation consoles, smart phones, and so on. It’s interesting in that as observers, we can see perhaps where the equilibrium price should be for many of these products.

Clearly, the Xbox Series X (the most powerful and newest Xbox) is considered an excellent deal at $499. There are shortages everywhere. Interestingly enough, we see that scalpers attempting to sell these video game systems in excess of $1000 dollars tend to fail to get many sales. So theoretically Microsoft could raise their prices and reach an equilibrium point—somewhere in between $500 and $1000. As our textbook describes it, the “guiding function of price (Keat et al., 2013).” They would lose some potential sales, however, since they are unable to meet all their demand at the moment, they would be able to raise more money per unit. It’s an interesting conundrum, however, in that consumers expect the manufactures to hold to their original prices for certain objects. The outcry from raising prices on an electronic device, for instance, may undermine the original goal of maximizing profit.

References:Keat, P. G., Y., Y. P. K., & Erfle, S. E. (2013). Managerial Economics: Economic Tools for today’s decision makers (7th ed.). Pearson.MarketLine. (2021, December 20). Microchip shortage threatens future growth in game console market. Verdict. Retrieved January 19, 2022, from https://www.verdict.co.uk/global-microchip-shortage-threatens-future-growth-game-console-market/

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