Free Essay on How the Law of Demand and Supply Affects Business Performance

Published: 2022-06-07
Free Essay on How the Law of Demand and Supply Affects Business Performance
Type of paper:  Essay
Categories: Business Microeconomics
Pages: 6
Wordcount: 1423 words
12 min read

The success of the modern businesses relies on intensive market research and analysis. The market study is usually linked to the demand and supply forces that exist therein in any consumer market. Therefore, by having access to this vital information, Managers of businesses can utilize their knowledge of market analysis to stay ahead of the competition and become successful in establishing an equilibrium between sales and production (Dewett, 2015). Through this equilibrium, the management occupies a niche that grants them an opportunity to maximize their profits. In his book, Dewett emphasizes how critical the market forces are to the performance of any business. In other words, the qualitative assessment of the market supply and demand is key to any venture seeking to dominate over its competition. Baye and Prince (2014), argues that for every additional unit of goods and services demanded, there is a general rise in the price. Thus, this phenomenon is known as demand pull. Conversely, when the supply of goods and services is amplified, there is a general fall in price. The former results in a competitive advantage while the latter unfortunately suffer a competitive disadvantage. Therefore, it is essential for business establishments to strike a qualitative equilibrium between the market forces of demand and supply to optimize business performance.

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According to Baye and Prince (2014), the market forces of demand and supply play an essential role in business economies. The qualitative analysis of these forces has since become a rich source of vital information to any business establishment. The critical mastery of these forces enables managers to design unique strategies that will allow them to exploit the full market potential (Salvatore, 2007). Unfortunately, very little is understood about the concepts of market forces and what crucial role they play in business. This paper seeks to outline, discuss and review these questions and eventually illustrate their application. (Becker 2017).


The demand for a specified good or a service is the quantity of such a good or a service a consumer is willing and able to purchase at a particular point in time. According to the law of demand, for an additional unit of demand, there is a proportional increase in the price. For example, if the demand for dresses in Walmart increases from Q1- Q2, then the corresponding change in price will be from P1- P2 as illustrated in figure 1.

Figure 1 (Becker 2017).

Nonetheless, it's important to note that the curve only holds true when all other factors are held at a constant (ceteris paribus). However, due to this paradox, the demand curve is prone to shifts that are attributed to myriad factors. These factors include the level of consumer income, advertisement, and consumer's preferences among others. Therefore, these factors can either increase or decrease the quantity demanded of a good or service. Additionally, the price of rival goods and services can also a factor attributed to demand change.


The supply of a particular good or a service is the quantity of such a good or service that a producer is willing and able to offer at a specified amount of compensation (price) (Baye & Prince 2014). According to the law of supply, for any change in the price of goods and services, results in a change that is directly proportional to the corresponding amount supplied. For example, if the price of purchasing a new Ford motor vehicle rises, the automotive company will seek to produce more units of the same to capitalize on their profits (Salvatore, 2007). This is illustrated concisely using a supply curve in figure 2. Thus, figure 2 shows how the price change of P1-p2 causes a direct and proportional change in Supply by Q1-Q2

Figure 2 (Baye & Prince 2014)

Nevertheless, the change in supply is often influenced by fluctuating costs of production coupled with stiffer industry regulations and hefty tax burdens.

Market Equilibrium

Nonetheless, when the market forces of demand and supply interact, the result is a well-balanced trade-off know as market equilibrium is obtained (Stiglitz & Rosengard, 2015). In modest terms, it is the mutually agreed upon price at which consumers are willing to purchase, and the producers are willing to supply. It is calculated by getting the intersection point of the demand and supply curve as shown in figure 3.

Figure 3 (Stiglitz & Rosengard, 2015)

To concisely arrive at the market equilibrium, sellers and buyers must be able to interact freely in a competitive market. Unfortunately, several factors such as government regulations enforced as price ceilings and price floors may hinder this equilibrium.

Comparative Statistics

In today's business world, staying ahead means that the difference between future survival and total collapse of a business. Thus, corporate managers and large companies such as Ford and Walmart have recognized and mastered the tricks in the analysis of the market and its forces (Ruttan & Thirtle, 2014). Therefore, comparative statistics incorporate the analysis of market forces and how they eventually affect the equilibrium. Using these vital statistics, managers can set competitive prices to enhance their profit margins and also design winning strategies to stay ahead in the industry.


To sum it up, we should all recognize how the forces of demand and supply can immensely shape our micro-economies. Thus, the modern world businesses immensely depend on the analysis of these forces for their success. Also, it is essential to acknowledge the external factors that shape these forces. For example, one should understand how government regulations on price ceilings and price floors affect the market supply or how income levels affect changes in demand. These influences directly impact competitive markets as either qualitative or quantitative in nature (Ruttan & Thirtle, 2014). Most importantly, the statistical analysis of competitive markets involves extrapolation of demand and supply analytics to arrive at a conclusive equilibrium. The statistical equilibrium is a crucial tool in planning for the future because it provides essential data for setting competitive market prices. This ensures that the productive firms do not experience cost overruns nor loses while at the same time maintain the competitive edge over its rivals.

Application Questions

Question 11.

The price of Random Access memory will increase with the corresponding increase in the market price. This because the additional input price forces the seller or supplier to ultimately transfer the cost burden to the consumer. This is the fundamental law of supply. However, the opposite will happen when the consumer income is reduced. This significantly lowers the quantity of demanded the RAM memory chips. As a result, the price will have to fall to compensate for the decline in profit margin.

Question 16.

By utilizing the demand equation:

Qd_ 300 _ 4P

In addition to the supply equation;

Qs _ 3P _ 120,

We can calculate the monthly price as follows:

300 - 4P = 3P - 120. Thus the monthly price of $60.

By calculating the tax reduction we also determine the new equilibrium as:

300 - 4P = 3.2P - 120. Hence the new monthly equilibrium of $58.33.

It is safe to conclude that the legislation proposed will save the consumer an average amount of $1.67 every month.

Question 19.

The Chilean wine will significantly rise in price because La Nina has given rise to grape scarcity in Chile. This makes sourcing wine grapes an expensive affair, hence, Rapel Valley will charge more for Chilean wine which will correspond to a shortfall in demand. At the same time, the Californian wine will become popular being an alternative to the now expensive Chilean wine. As the consumer demands more of Californian wine, the price will rise correspondingly.

Question 21

The advertising executed by Mid Towne IGA's is quite informative to consumers. The agenda of the advertisement is meant to attract more consumers by convincing them why they are better than their rivals. As a result, they expect a shift in the market equilibrium to favor their supermarket by bringing in more customers. The figure below best illustrates the shift in equilibrium from E1- E2


Baye, M. R., & Prince, J. T. (2014). Managerial Economics and Business Strategy (8th Edition). New York: McGraw-Hill.

Becker, G. S. (2017). Economic theory. Routledge.

Dewett, K. K. (2015). Modern Economic Theory (ME). S. Chand

Ruttan, V., & Thirtle, C. (2014). The role of demand and supply in the generation and diffusion of technical change. Routledge.

Salvatore, D. (2007). Managerial Economics in a Global Economy 6th Edition. Oxford University


Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth international student edition. WW Norton & Company.

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