Determining the Price of Diamonds: Supply and Demand Analysis

Date:  2021-03-25 04:15:42
7 pages  (1794 words)
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This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

The process of determining the price of commodities using the supply and demand technique is a widely adopted method and reliable for products with stable market trends. The method involves the evaluation of the quantity of supply in a particular period about the needs of the market in the form of demand. Each determinant factor is compared with the shifts and moves in prices associated with that product at the specific time. Therefore, based on this methodology, the scenario in the market may depict three major occurrences depending on the nature of supply and demand. The market could be characterized by low supply but high demand of the products or services, which may lead to higher prices than the estimated normal cost. On the other hand, the supply may be high, but the demand remains very low such that the cost of the brands or service becomes relatively cheap. Moreover, a rare but possible and short-lived case may emanate in cases where the demand is equal to the market supply, which leads to equilibrium price for the brand or service.

Factors Affecting the Price of Diamond in the Market

The price of diamond can also be determined through supply and demand analysis. The process requires the understanding of how some essential factors define the demand and the supply of the product, which in turn affect the market price over a specified period. Diamond is a scarce commodity with a high market value. The most senior producers of diamond in the world include countries such as Botswana, Russia, Australia, India, Democratic Republic of Congo, and Canada. Other states only produce the product on small-scale basis; however, they also contribute to the total market quantity (Spektorov, Linde, and Wetli, 2001). The factors that determine the market price for a diamond in any economy can be broadly grouped into two broad categories: the factors related to supply levels also called Supply Factors and those associated with the magnitude of demand also known as Demand Factors. Each of the elements for demand and supply affects the diamonds market price at different degree; however, they contribute to the shifts and moves on the overall supply and demand positions as well as the associated costs.

Socioeconomic Factors

The economic performance of the local and global economies is one of the elements that define the price of commodities across industries. The level of economic growth and development plays a key role in determining the level of social capital as well as setting the degree of return on investment. The inflation rates, capacity to invest, and the extent to which business can sustain their operations depends on the socioeconomic status of the market of service. The price of diamond in a local market will be higher based on the economic downturn and poor performance, which discourage supply in the market. However, such as case will only be short-lived since the nature of supply and demand for diamond does not depend entirely on the regular market valuation theories (Spektorov, Linde, and Wetli, 2001; Siegel, 2009). On the other hand, the income elasticity associated with diamond supply is elastic, which does not depend wholly on the financial performance of the economic domain associated with the trades.

Changing Tastes and Preferences

The representation of a brand in the market depends on the preferences of the targeted market. The needs and tastes of customers keep changing with time and suppliers are keen to capitalize on such cases based on the price of products. Whenever the customers desire for specific products increases the demand in the market will also escalate. In the event of diamond, an increase in the need for class and adorable look enhances the demand in the market, which creates room for more supply. Nevertheless, based on the scarcity of diamond, the price could decrease contrary to conventional products since the supply of diamond depends on the availability rather that the market needs. Moreover, when the customers have the capacity to purchase the diamond and related products, then the organizations in the monopolistic business tend to capitalize on their income projections based on the future shifts regarding the tastes and preferences. Therefore, it is possible for organizations to fix the price to maximize the profits based on price or increase the market supply and take advantage of high unit sales (Siegel, 2009).

Existence of Synthetic Diamond Alternatives

The high price of diamond has discouraged the customers from purchasing the associated products with some considering events such as wedding ring and moments of gifts. Such a scenario has encouraged the introduction of synthetic diamonds alternatives such as the polishing of brand surfaces. The customers can access the options at a cheaper cost, which creates a declining demand for the quality diamond. In such a case, the organizations controlling the mining, processing, and selling of the related products will consider an alternative avenue to sustain the profit margins. One of the direct approaches is to set the price of the products at a relatively lower price with limited supply to create an economic scarcity for the future price increase (Siegel, 2009). The controlling of the price of diamond in the market through monopolistic forces will later recover the sales, the price levels, and the profitability after a designated period. Therefore, the synthetic alternatives only act as an avenue to balance the needs of the customers and the high prices for the diamond. Nevertheless, the level of capital of operation for those investing in diamond trade is enormous creating a chance to benefit from operating on economies of scale and price discrimination.

Monopoly Production

The supply of diamond in the market is controlled by a few individuals with strategic plans that operate on a chain of agents. The entry of new firms is limited since most global organizations are family entities subject to inheritance. Therefore, these organizations are operating on complex economic and financial techniques, which block other agencies from joining the industry. Moreover, the businesses have been in existence for many years running on huge capital base and with high profit and returns (Siegel, 2009; Vanneste, 2015). The financial power of such firms is high since they directly influence the diamond market from the mines to the casting stage. The power of monopoly is a tool that has been used to set the price of diamond based on the predicted trends and shifts in the market. Such moves are taken to control the supply and demand to ensure that the price remains high.

Artificial Scarcity

The process of mining diamond is subject to controlled processing by few firms, which can control the supply in the market. The total volume of the diamond rocks mined across the globe has increased over the years with the entry of African countries and improved technology. It is expected that the market supply to increase in line with the mining capacity. However, the availability of the refined and high-quality diamond is limited signifying the existence of artificial scarcity created by the trading firms. Such a move is a method used by monopolistic businesses to keep the price of the products they trade extremely high (Siegel, 2009). Over the years, the price of diamond has always been too high owing to the limited supply of in the market; however, the process of mining has never stopped across countries such as Botswana, Zambia, India, Democratic Republic of Congo, and lately Zimbabwe.

Increase in Targeted Population

The level of market control, as well as the revenue, gained through the trading processes depends on the number of the targeted population. Most of the sales for the products in the market are directly proportional to the segmented market. The same case is similar for the selling and buying of diamonds in the global arena. When the growing market seems stable, most investors alter the prices based on their supply reserves to maximize profits (Siegel, 2009; Vanneste, 2015). The supply of diamond in the market when the targeted population increases are set an optimum level that will not compromise the required scarcity level but the price will also be higher. The implication of such technique is to sustain the high prices and the artificial scarcity nature of the product in the market as well as maintaining the profit margin for investors. On the other hand, a decrease in the targeted population will lead to lower prices, but the supply will be restricted to small quantities. Nevertheless, the lower prices will differ only with a small magnitude to the optimal market prices.

Changes in Disposable Income

The changes in income of individuals indicate an increase in their purchasing power. The ability of people to own their desired products and services should be controlled. If necessary economic measures are not undertaken then, the corporate sector will suffer owing to the differing rates of supply and escalated demand. Therefore, most organizations tend to increase the prices of their services and brands whenever the income of the targeted population increases. Such moves are meant to balance the supply levels and the demand in the market. When dealing with diamond, an increase in disposable income indicated an enhanced ability of people to purchase the diamond. Therefore, since the firms cannot compromise by increasing the supply, the prices are slightly raised to discourage increased purchasing and to maintain the scarcity levels required to sustain the market, which creates the inelastic relationship.

Excess Tobacco Consumption

Tobacco is one of the products whose consumption is inclined to addiction and therefore tends to have a stable supply and demand behavior irrespective of the price changes and economic performance. Most countries have specialized in large volume production such as the United States, Russia, India, and Brazil. Most governments earn millions of revenue from the tobacco trade, which result from the early consumption among the population at the age of 14 and extends to the elderly individuals. Addicted users tend to use tobacco for their entire lifetime, which contributes to over 49% of users across the world (Rovina et al., 2000). The use of tobacco may be considered as private smoking or social use; however, the irrespective of the case the use of tobacco contributes to the increasing number of behavioral deaths. It is estimated that over 400,000 people die every year because of excess use of tobacco in the US, Spain, Turkey, Brazil, and India (Rovina et al., 2000). Moreover, the implications associated with the use of tobacco extend to the third party leading to negative externalities of economics. Such a phenomenon, therefore, attracts government intervention to assist in controlling the rate of consumption among the users for individual and community protection.

Negative Externalities Associated with Excess Consumption of Tobacco

The excessive use of tobacco is associated with external costs, which in most cases leads to a variation between the social cost and the private cost. Whenever the social cost escalates above the individual cost, then negative externalities arises. A case where...

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