Economics is governed by forces of demand and supply. The week’s readings focused on changes in demand within the industry and how these tend to impact demand and supply for individual firms. The discussion also focused on how the prices change over time because of changes in demand or supply.
The most common observation that has been seen is that increase in demand with same supply leads to an increase in the prices. This was observed in the current pandemic wherein the prices of certain essential goods notched up because the supply remained consistent and demand shot up (Sauter, Kienast, Bolliger, Winter & Pazúr, 2019). Therefore as per the demand supply curve, the equilibrium price was set in a higher range. Therefore this requires that firms must engage themselves in increasing the supply to meet the demand so that the price does not increase. The problem with increasing prices is that it becomes affordable to a much smaller segment of people. The demand is impacted by many controllable and uncontrollable factors. The controllable factors of demand allow companies to change demand as per certain internal factors like price, advertising, quality of product etc. (Froeb, McCann, Shor & Ward, 2018). For example, if company improves product quality at same price, the product will be bought by a much wider segment of people.
There are certain uncontrollable factors as well that tend to impact demand. These factors are not in control of the firm and therefore the changes in demand cannot bring about sudden changes in the supply and this could lead to either increase or decrease in prices (Thomas & Maurice, 2017). The main idea of economics is that the changing demands and supply must bring back the equilibrium prices. As long as the equilibrium price is not obtained, It could create opportunities for bid ask spread wherein the people buying at lower price points will be higher.
The current pandemic has led to tripling of demand for sanitizers. In the current situation, this is one of the uncontrollable factors of demand since it is a black swan event that was not predicted in advance. If the supply is not increased, it could lead to an increase in prices that could make the product less affordable for the company. Therefore, it is required that the firm must focus on increasing the supply so as to match the demand. This will make sure that the number of customers of the product do not go down (Thomas & Maurice, 2017). Further this also makes sure that the company stays relevant and is able to maintain its market share. If the supply is not increased to meet the demand, it may also allow entry of new players in the market that could further take away market share of the company.
References
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial Economics: A problem solving approach. Cengage Learning
Sauter, I., Kienast, F., Bolliger, J., Winter, B., & Pazúr, R. (2019). Changes in demand and supply of ecosystem services under scenarios of future land use in Vorarlberg, Austria. Journal of Mountain Science, 16(12), 2793-2809.
Thomas, C. R., & Maurice, S. C. (2017). Managerial economics. LEXINGTON BOOKS.
2)Chai
The economics of any country or any organization is driven by forces of demand and supply. It is through the combination of supply and demand that organizations are ale to settle an equilibrium prices at which the products are finally sold in the market. The demand is impacted by many factors. The factors that tend to impact demand are classified into controllable factors and uncontrollable factors. These factors are such that they can be divided into controllable factors and uncontrollable factors (Froeb, McCann, Shor & Ward, 2018). Controllable factors of demand are those that are in hands of the organization. These could include factors like price, advertising, product quality etc. There are certain uncontrollable factors that also tend to impact demand. These include factors like recession, the covid pandemic etc.
The changes in demand lead to two changes for the organization. Either changes in demand can lead to changes in the supply or they can lead to changes in the prices of the product being considered. The changes in prices lead to the establishment of a new equilibrium price. If the demand has gone down, the prices tend to go down to reach the new equilibrium price and vice versa. Supply changes also are accompanied by changes in the price. This leads to establishment of a new equilibrium for the company or economy that allows them to reach at new equilibrium price (Cho, 2019). gap between supply and demand creates opportunities for arbitrage and allows firms to understand the prices that need to be taken under consideration. These create opportunities for bid ask spread where in the firms can determine the amount of demand for a given supply under consideration.
The covid pandemic has brought all the economies to a halt. While it has given a boost to online shopping, it has led to a strong reduction in demand. Some of these may be short term changes while many of these may also be long term changes. The companies are trying to match the demand with increased supply. Because of pandemic, it has been seen that demand for sanitizers has gone up. Therefore it is recommended that J&J must increase their production of sanitizers (Xiao & Gao, 2017). The focus on maintaining high hygiene standards has been increasing. There may be certain firms that may tend to gain market share during this time in the sanitizer market. To continue increasing their market presence, they need to double the production capacity. The demand for sanitizers has not been ending and shall continue to increase for some time. If J&J does not make any move now, it could lead to firm getting negatively impacted in the sanitizer market, which may also impact the profits of the firm.
References
Cho, J. E. (2019). The Impact of Industry-level Competition on the Excess Stock Returns due to Changes in Cash Holdings. Journal of the Korea Academia-Industrial cooperation Society, 20(5), 163-169.
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial Economics: A problem solving approach. Cengage Learning
Xiao, X., & Gao, Y. (2017). An event study of the effects of regulatory changes on the food industry. China Agricultural Economic Review.