The supply and demand concept is one of the basic concepts of economics and forms the spine of a market economy. Demand as used in the market economy is the quantity of a product or service that is desired by customers. The demand quantity is the number of goods that the customers are willing and able to buy at a given time and selling price and this relationship is expressed by the use of a demand curve. Supply is the quantity of a product that the market is capable and willing to offer. The quantity supplied is the amount of a product that suppliers are willing to supply at a given price and time to form a supply curve. The correlation that exists between demand and supply underlies the forces determining the allocation of resources to achieve the best areas to allocate the limited resources. (Debreu, 1959)
From the information given about Mrs. Acres business, the demand for pies is increasing while the supply of the same is at a standstill due to the maximum utilization of the labor; and infrastructural resources like labor and facilities. The supply of the pies in the short run will not be affected in terms of increase or decrease; this is because the resources of the business that comprise labor; facilities and infrastructure are at the optimal use, therefore, are not capable of producing more pies to be supplied to the customers to meet the increased demand. The demand for pies has been rising as a result of the excellent quality of production. However, in the short run, the demand for the pies will continue increasing even though the increasing demand will not be addressed by the current level of supply. The price of the pies in the short term may increase as a result of the increased levels of demand that cannot be addressed by the current supply. As a result, the business will adjust to an over-demand situation by increasing the price of the pies that will in turn cut down the increasing demand. (Garegnani, 1970)
Assuming that the business as a response to the increasing demand increases the price of the pies; the supply of this business will not be affected due to the fact that the factors of production in use are already used to the maximum level. The demand for the product within the long-term will reduce as a result of the price increment that means that some of the buyers will not be able to meet the higher prices. Due to the increase in levels of demand without a corresponding increase in the level of supply, the price of the product may rise to result in a reduction in the demand levels. In the short run, the demand levels may reduce to levels below the supply level of the business, therefore, creating the need for a reduction in price to help recover the lost demand. (Debreu, 1959)
Assuming that the business responds to the excess demand by increasing the price of the pies but without increasing the levels of supply; the supply remains the same in the short and long term due to the lack of more resources to be employed to meet the changing demand needs. The demand for the pies in the short-term will reduce to the number of clients that can meet the higher prices of the commodity. However, in the long run, the demand levels may reduce to levels below the supply available; resulting in the reduction of prices again that in return leads to increased demand levels.
Monopolistic competition is that which exists in a market structure where different sellers produce similar goods that are slightly differentiated in that each producer sets his own price and supply quantity without influencing the market forces as a whole. (Garegnani, 1970)
The factors of production that are needed in the operation of a soft drinks business include; Land that includes all the natural resources and natural opportunities like water which is used in the processing of soft drinks. Labor constitutes human mental and physical capabilities. An example of this is human capital that constitutes workers that are involved in the running of the soft drinks production process. Capital is the factor of production that constitutes the material yields of human labor that are used in the production process. These include money and production inputs like machinery that are used in production. The last factor of production needed in the operation of a soft drinks business is Entrepreneurship that constitutes the management of the other factors of production. An example of the constituents of entrepreneurship needed in the running of a cold drink business include innovations and business acumen. (Robert, 2005)
Land as a factor of production consists of natural endowments that can be used to give the business a competitive advantage by using its constituents like water conservatively. This can help the business by reducing the expenses used in the production process, and as a result, yielding funds that can be used in investing to improve the innovative expertise of the business. Labor as a factor of production constitutes the mental capabilities of employees; which can be used in creating inventions and innovations within the production processes that will help reduce the overall cost of the production process. Capital that includes machinery can be used towards the competitive advantage of the business through renting of machines that are needed occasionally; rather than buying so as to use the extra money in promoting the production processes. Entrepreneurship that includes business management can be used towards the competitive advantage of the business by ensuring that the other three resources are tabled in a way that will ensure the production of the best quality products and timely distribution. (Joel, 2002)
Debreu, G. (1959), Theory of value, New Haven and London: Yale University Press.
Garegnani, P. (1970).”Heterogeneous Capital, the Production Function and the Theory of Distribution“. Review of Economic Studies, V. 37, N. 3: 407-436
Joel, S. (2002). “Can We Trust Social Capital?” Journal of Economic Literature, 40(1): 139-54.
Robert, V. (2005). “On Labour Demand and Equilibria of the Firm”, Manchester School, V. 73, N. 5: 612-619