Analysis of Market Forces: Demand and Supply and Quantitative Demand Analysis

Introduction

The quantitative and qualitative tools are very useful in managerial economics. For managers to be successful, they should understand all the details and the broader picture surrounding their roles. Many people have come up with an analysis of how the markets function by providing an overview of demand and supply. The best example is Baye and Prince 2014. The essay will review the Market Force: Demand and Supply Chapter two buy critically analyzing and explaining the concept of demand and supply and how they are used to come up with important managerial decisions. The essay will also critically examine chapter three of the book which is the quantitative demand analysis. This essay will focus on analyzing parts such as quantitative forecasting like the elasticity of demand and also concentrate on the regression analysis in which the managers can use in answering the patient questions. According to Marry Hall, demand and supply are essential to major economic activities (Hall, 2018, para. 1). These two concepts were viewed by Baye and Prince (2014) as tools that enable the successful manager of most business organizations to get to understand the greater picture (Baye& Prince, 2014, p. 38, para . 1). Therefore the use of these tools will significantly allow managers to make informed decisions involving employment, inventory, pricing advertising, negotiations among others to obtain the competitive advantage over their business rivals. Demand and supply are very significant qualitative tools that are used by organizations to predict the market availability, labor needed and the material cost as they all have the potential to significantly impact the performance of the organization if they are not well understood.

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Discussion

According to many scholarly writers including Baye and Prince 2014, the free market economy can be determined by the forces of demand and supply. The two are among the most important aspects of managerial economics. They are sometimes referred to as the backbone of the market economy. Demand is the how much or the quantity that a certain product or service is desired. While on the other hand supply represents the quantity that the market can offer. Demand and supply theories allocate resources in the most efficient way possible

The market is said to be equilibrium when the supply and demand curves meet or intersect. This shows that the quantity of demand and supply are equal in the market. Managers use this to determine the equilibrium quantity and the equilibrium price. In order to perform the quantitative demand, analysis managers have to understand the market by reading the demand curves and the supply curve. Managers also use the market equilibrium to come up with some important decisions when performing the quantitative analysis. Therefore, the successful manager should have adequate knowledge of these aspects and other quantitative tools because they are essential (Eastin and Gray, 2014, p. 2, para. 1).

Demand

In managerial economics, demand is used by organizations to determine the amount/quantities of products that should be produced and their prices (Anderson, 2018, p.1, para. 1). It is important to note that companies are set up to provide a particular product because there is a demand for that product. Many business and organizations have failed because of the insufficient demand for their products and services. Therefore, market demand is one of the pillars that support the establishment, the survival and the profitability of a given business (AgDM, 2007, p.1, para.1).

The demand function is used to describe the volume of a particular good that will be bought when important variable, for instance, price changes. According to the law of demand, it is stated that when all the other factors are being kept constant, the price always affects the quantity of m, a market demand because market demand still fails when there is a significant increase in the price level of a particular product and always increases when the price reduces. This is what leads to the movement in the demand curve. However, it is not still that the demand abides by its law. Some other factors cause a shift in the demand curve, and these are referred to as demand shifters. According to Baye and Prince (2014), some of these factors include; the availability of the commodity in the market, test, and preference of the consumer, consumers income, the changes in population size and the demographics, consumer's expectations, the advertisement and the price of the related product in the market (Baye& prince, 2014, p. 40, para.1). These demand shifters can affect the desire of a customer to purchase a particular and therefore, it is essential that managers should pay attention to them. To counter this, managers should use the concept of consumer surplus to determine the value of a given product. According to Baye and Prince (2014), consumer surplus is the value consumer obtains from a particular product that he/she does not have to pay for (Baye& Prince, 2014, p. 46, para.1). Knowing this enables managers to determine the amount that customers are willing to pay more than the usual price for a particular product.

McDonald's substantial market changes represent a perfect example of not only how some consumer taste and the change in population and demographics affect the demand, but also it presents how good management can be given to avoid the negative consequences in an organization (Peterson, 2016, para 1-6). According to wall street journal (2005), McDonald's double-digit growth was at the verge of collapsing due to higher product prices, demographic changes, change in consumer taste, the concerns over the obesity and the mad cow disease and more top competition. By changing its CEO and adopting new managerial skills, McDonald's managed to respond effectively and lead to bouncing back as the fast-food giants.

Supply

The quantity of products or the commodity that the producer is willing to produce for sale at a given price in a given market is referred to as the supply. Just like demand, the quantity that is supplied changes with the price change when the other factors are kept constant. Such that, when the price of a particular good increases its supply also increases and when the price falls the quantity supplied falls. There are also supply shifters like the demand shifters other the price which affects the supply of the product. These shifters include some competitors, technology, input price (land capital and labor), taxes and government regulations and producer expectations amongst other (Baye & prince, 2014, p. 48, para.3).The number of products that can be made available at varying prices that the products are given and the supply function describes the variations of other significant variables, for instance, the cost of the input. Like demand surplus, there is also a producers surplus which is the excess amount that is received by the producers beyond their expectation and thus motivating them to produce this given product.

A great example in this aspect is the change in the supply and demand for coffee from 1998 to 2005. The global amount of coffee tremendously increased in 1998 due to the new markets that were opened and the favorable weather conditions (Benefieldhope, 2014, para.7). Then there was an overproduction which was more than the demand and thus forcing a sharp decline in the price. The change in weather in 2005 affected the coffee supply, but on the other hand, it was advantageous to the farmers because there was a reduction of the supply.

Market Equilibrium

The price of a particular commodity that is determined by the intersection of the market supply curve and market demand curve of a specific product in a very competitive market is referred to as the market equilibrium (Baye & Prince, 2014, p. 56, para . 3, p . 57, para.1). if in case the market price is observed to be above the equilibrium price it means that the quantity supplied is greater than the quantity that is demanded. This, therefore, will create a surplus hence the market price will fall. In the case where the market price is below the equilibrium price, it means that the quantity supplied is less than that the quantity that is demanded, this will, therefore, create a shortage and hence raising the market price. The price is, therefore, determined by this intersection of sellers and buyers. However, there is some instance where the government imposes some restrictions on the rise and fall of the commodity price hence affecting the market equilibrium. The price floor, the price ceiling and the full economic price that are created by the government influences the market price (Baye & Prince, 2014, p. 57, para.1).

Quantitative Demand Analysis

Quantitative analysis can be defined as the techniques that are used to understand the behavior of the demand and supply by using statistical and mathematical modeling, research and measurement. It is used to represent a given reality in terms of numeric values. For managers to determine changes in the different variables of demand, they can acquire valuable tools from the quantitative demand tools. When these tools are used effectively, they give the direction of change that can be adopted by managers. There are different types of elasticity analysis and these include; income elasticity, price elasticity and cross-price elasticity of demand (Baye & prince, 2014, p. 79, para . 1). On the other hand, regression analysis allows managers to make informed predictions about changes in market demand. The tools are handy in making decisions that concern the inventories, the unit of products that are produced and the number of employees.

Conclusion

In every market, there are demand and supply sides. It is therefore imperative for managers to understand the two forces to make informed decisions. Nevertheless, demand analysis allows organizations and businesses to have proper planning and therefore have a reliable projection. Generally, it is easy to conclude that; if all factors are kept constant, consumers will demand more products at a lower price and suppliers will supply more products at higher prices. However, with the changes of shifters, there will be a corresponding change in either demand or supply. If very vital for managers to understand the importance of demand analysis and therefore develop capabilities that will help them utilize the demand tools.

Application Questions

Question 11

Solution:

By raising the input that was increased by the production costs the supply curve for RAM chips will tend to have a leftward shift. This will hence result in a higher equilibrium of the RAM chips. If income falls, there will be a decrease in the demand for RAM chips as they are normal goods. Therefore the price of RAM chips will decrease due to the decrease in demand. The ultimate effect of the changes in demand and supply on the equilibrium price of RAM chips is indeterminate. The price that you will pay will depend on the relative magnitude of the decreases in the demand and supply. So it will either rise or fall.

Question 16

Solution:

We first start by equating the initial quantity demanded and the quantity that was supplied; hence we get: 300 - 4P = 3P -120. By solving the price, we find the initial equilibrium to be $60 per month. After reducing the tax rate, the equilibrium price will be determined as shown in the following equation: 300 - 4P = 3.2P - 120. So the new equilibrium balance will be approximately $58.33 per month.

Following the above demonstration, a typical subscriber will save about $1.67. This is done by calculating the difference between $60 and $58.33.

Question 19

Solution:

Because...