Table of Contents
This study aims to discuss the supply demand model of economics. This goal is achieved by using the smart phones demand and supply as the case study. The model will compare relevant literature written in this area of study. The comparison made will enable the study to build a demand and supply model. Firstly, the study will show the several key terms that related to supply demand model and defined them with relevance to the context of the study. The study will then carry out a sensitivity analysis on the model to find any shortcoming that accrues from its application in economics. This will enable the essay to lay a theoretical base used to assess the effects that changes in the demand or supply has on production.
Demand refers to the relationship between the price of a particular good or service with its overall quantity demanded by consumers at a specific time and under particular circumstances. This means that at each price provided for a particular good or service the demand relationship, as laid out by the rules applied to discern the quantity consumers will buy at that particular price. This is the quantity demand. It is clear that the terms demand and quantity demand are constantly confused. Therefore, it is prudent for this study to distinguish them. According to Sherman (97), demand refers to as the willingness and capacity exuded by customers to buy a product being offered in the market. On the other hand, quantity demand defined as the overall quantity of goods or services that customers are willing and capable of purchasing at a particular price ceteris paribus.
With reference to the demand relation in economics, it is paramount for this study to find when an economist with reference to the supply demand model needs claim that a customer has a demand for a particular good or service. This decision made as noted by Sherman (133), when the economist knows that the customer has money with which he or she can buy the good or service. The customer must also depict that he or she is willing to exchange the money for the product at that particular time. Therefore consumers demand for products that they need. However, this need is not the demand, if it lacks the purchasing power, or if the supplier lacks the products required by the consumers at any given time (Finarelli, Hugo and Johnson 1).
This term treated symmetrically as demanded by economists. This is because it also entails explaining the correlation between the price and quantity of goods and services supplied in the market at a given period. Therefore, supply defined as the willingness by the supplier to sell a good or a service at a particular price that harmonises with the price the customers are demanding for and they willing to pay at (Sherman 133). This relationship between the demand and supply is well illustrated by a supply demand model.
The Supply Demand Model
Today, the supply demand model is an elementary concept in the field of micro and macroeconomics. This is because of its contribution in the market. For instance, the market price of a product is determined by its supply vis-à-vis its demand. Therefore, economists can use the supply demand model to describe how the price of a product can vary as a result of a balance between its availability and demand in the market (Sherman 107).
In this field of microeconomics, the theory of supply and demand used to describe, explain and predict the price and quantity of goods sold in a perfectly competitive market. As a result, it is one of the most elementary models ubiquitously used as a basic building block for a wider range of very important economic models and theories in micro and macroeconomics. The supply demand is a model for understanding how to find the price and quantity of a good or service sold in the market. The supply demand model comprises of two different groups; buyers and sellers. These two groups interact in the market field to bring out the laws of demand and supply that architecture this model. The supply demand model relies heavily on perfect competition in the market. Perfect competition in the market means that there are enough buyers and sellers in the market willing and capable of bidding for the goods or services being offered by the market at a particular price (Hirschey 302).
This perfect competition arrived through antagonism between the buyers who bid against each other. As a result, this raises products’ prices. On the other hand, the sellers bid against each other to win the buyers, thereby lowering products prices. This antagonism continues until the two groups arrive at a common ground which is the equilibrium point. Equilibrium means the bidding by buyers and sellers is over, and no one else in the market is willing to sell or buy the products at lower prices than those arrived at. The following case study of smart phones illustrates this equilibrium in which the demand and supply curves are plotted on the same graph (Mobile Reference 27).
In 2008, the demand for smart phones increased tremendously. This growth saw the smart phones eclipse the mobile phones market share. According to Rrammy (1), smart phones now account for over 58% of the mobile market share. This increases in demand for smart phones prompted manufacturers to supply more of the product. As a result of the increase in supply and demand for smart phones, the equilibrium price decreased and the equilibrium quantity increased. This can be represented diagrammatically as follows.
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This increase in demand for the smart phones attributed to the following reasons.
It is clear smart phones had more features than the conventional mobile phones. For example, smart phones had more social networking apps, wording processing and presentation apps and high-speed internet connectivity. These features resulted in the consumer preference for the smart phones over the mobile phones, so increasing their demand (Krammy 1).
Increase in the Number of Buyers
Smart phones attracted a wider group of buyers. The young found them entertaining; business people found them useful in sending emails and organising their businesses. This increased their demand (Krammy 1).
Supply Demand Sensitivity Analysis
It is paramount for organisations to find and effectively meet customer’s demand for their products, so that they supply according to the market forces. This is because it is the fundamental cause on which all the successful companies in the globe claim their success from. That is, they are able to figure out the demand, thus, effectively meet their customers’ needs accurately. This can only be achieved, if the organisation’s managerial decision-making organisation is capable of carrying out a sensitivity analysis of demand. This is because this ability will influence how it reacts to stream its responsiveness to the changes in factors that are constituent underlying demand-supply function (Basic Economics 1).
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The most crucial measure in supply demand sensitivity analysis and economic managerial decision-making is elasticity. Elasticity is the degree in which the demand or supply curves react to changes in the price of a commodity in a joint demand and supply graph (Basic Economics 1). When change in the price of a commodity results in high degree change in the demand and supply curve, then demand and supply are elastic. On the contrary, if the degree in change of the curves is very low, then demand and supply are inelastic. Consequently the change in quantities on the graphs is almost negligible.
The following factors show elasticity of supply demand model. First is the necessity versus luxury goods. The most important products to a consumer are hard to substitute. Therefore, less change in quantity supplied or purchased lest of a change in prices. They are inelastic. The second factor entails finding out, if the substitute goods are available. If the products have close substitutes, elasticity is high. A change in the price of one product will result in consumers buying other products. The third factor aims to define the products’ market. A bigger the market spectrum for a product translates into more substitutes. This means a product with high market definition is highly elastic to the demand and supply. Lastly, if consumers or suppliers have a long time horizon, they can easily find a substitute. Therefore, they are more elastic (Basic Economics 1).
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Recommendations for Effective Organisation Forecasting in Supply Demand Model
It is clear that the supply demand sensitivity analysis advocates for effective organisation forecasting of consumer demand. This is because the effective demand forecasting by the organization enables it to prepare for the shifts in demand and avoid missteps that would result from the failure to do so. In order for an organization to meet the effective forecasting of demand shifts, the management must execute these steps.
- The management should merge historical data
- It should analyze the trends that emerge from the historical data gathered
- It should name the core drivers of consumer demand in the region
- It should name the key organizations it can benchmark on to learn
- It should model its prevailing conditions
- It should devise core assumptions to use for its population-based demand
- It should devise core assumptions for provider-level demand
- It should form a baseline on which it should forecast demand in the future
- It should test how sensitive projections make changes in their core assumptions in case of flaws identified in its assumptions