Barks Computer Screens Case
A market analysis is a key component of a business plan and should be conducted every few years due to market and product changes. One important aspect is identifying the supply and demand of a product in the target market. The supply curve is a positive sloping curve because as the price increases so does the quantity of product. The demand curve is a negative sloping curve because as the price increases the demand for the product decreases (Hirschey, 2012).
Changes can occur to both curves as changes in the market and economy take place. This will cause the curves to shift either to the left or the right. The supply curve is affected by changes in the economy such as an increase in the prices of material or a natural disaster that would prohibit supply of product. The demand curve is affected by changes in population income, economic outlook, government spending, and real interest rates (McBride, 2008). In the Barks Computer Screens Case, Barks has hired me as a consultant and provides the results of his market analysis.
He has found that the functions for supply and demand in his market are:
Qd = 157 – 35P + 12. 5Pw + 0. 1Y and Qs = –120 + 75P – 30Pw + 13PL + 12R.
Where: Qd = Demand, Qs = Supply, Pw = Average price of Wides, Y = Income in his market, PL = Price of labor, and R = Is the average humidity level measured in hums.
I have assumed the quantities demanded and supplied are a function of price and applied the following conditions:
Pw = $6. 00, Y = $1,600. 00, PL = $9. 00, and R = 25.
Demand: Qd = 157 – 35P + 12. 5Pw + 0. 1Y = 157 – 35P + 12. (6) + 0. 1(1600) = 157 – 35P + 75 + 160 = 392 – 35P.
Supply: Qs = –120 + 75P – 30Pw + 13PL + 12R = -120 + 75P – 30(6) + 13(9) + 12(25) = -120 +75P – 180 + 117 + 300 = 117 + 75R.
The following price conditions were used to determine supply and demand market conditions: $1. 75, $2. 10, and $2. 70.
Qd = 392 – 35P = 392 – 35(1. 75) = 392 – 61. 25 = 330. 75.
The same equation was used for the other two prices to determine quantities demanded at each price.
At $2. 10 the Qd is 318. 50 and at $2. 70 the Qd is 297. 50.
Qs = 117 + 75P = 117 + 75(1. 5) = 117 + 131. 25 = 248. 25.
The same equation was used for the other two prices to determine quantities supplied at each price. At $2. 10 the Qs is 274. 50 and at $2. 70 the Qs is 319. 50. The following graph illustrates the supply and demand curve to reflect my findings. As you can see on the above graph, Qd and Qs intersect at a point. This point is when market equilibrium is met. “Market equilibrium describes a condition of perfect balance in the quantity demanded and the quantity supplied at a given price” (Hirschey, 2012).
To determine equilibrium price, I set the Qd equation equal to the Qs equation and solved for P (price): 392 – 35P = 117 + 75P, 275 – 35P = 75P, 275 = 110P,2. 5 = P. Equilibrium price is $2. 50.
To find equilibrium quantity, use P = 2. 50 in either Qd or Qs equation:
392 – 35P = 392 – 35(2. 50) = 392 – 87. 50 = 304. 50.
Equilibrium quantity is 304. 50. The equilibrium price and quantity determines shortage or surplus. A surplus of product occurs when actual price is greater than the equilibrium price. A shortage of product occurs when actual price is less than the equilibrium price (McBride, 2008).
Based on an equilibrium quantity of 304. 50 the only time there will not be a surplus or a shortage is when they are priced at $2. 50. When Wides are priced at $1. 75, there will be a surplus of 26. 25 screens. At $2. 10, there will be a surplus of 14. At $2. 70, there will be a shortage of 7. My recommendation is to price the Wides at $2. 50. Having a surplus builds inventory but eventually decreases market prices and product output, whereas a shortage can increase market prices and create a push on production. At equilibrium, revenue is generated without a change in price or quantity produced (Hirschey, 2012).
Hirschey, M. (2012). Fundamentals of Managerial Economics, 9th ed. (9th ed).
South-Western Educational Publishing. Retrieved from http://digitalbookshelf.
South university. edu/books/1111439907/id/ch4 McBride, C. (2008). Supply & Demand Analysis Chron. com.
http://smallbusiness. chron. com/supply-demand-analysis-727.
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