Demand and Supply and their effects

 

Spreadsheet analysis provides good means for studying demand and supply and their effect of changes in various endogenous and exogenous variables. The supply and demand related factors within a firm’s control are referred to as endogenous variables. Variables that can hardly be controlled by the firm’s management are referred to as exogenous variables. Exogenous variables would include pricing of products, advertising, strategies, and other factors the firm has the power to manage their control. The exogenous variables include pricing abilities of competitors, advertising strategies of competitors, and industrial or market factors hardly within the firm’s management. Comparative statistics can be used to analyze the marginal influence on the supply and demand of changes in various factors. Spreadsheet analysis helps in understanding the implication of demand and supply in operating scenarios within a limitless range.

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The unlikely outcomes can be established with ease and a complete picture of the operating environment for the firm could be established as well. A firm working on its demand and supply and establishing the various ways the two market phenomena can influence its endogenous and exogenous factors sets strong strategies for responding to the factors. A hypothetical case on Sunbest Orange Juice can be used in providing illustration for this process. Sunbest Orange Juice is a product of the Orange County Growers’ Association of California. The demand and supply for this firm’s products move in the opposite direction during various seasons. The demand for orange juice is high during summer while the supply for the same product is low during the same season.

Effect of Demand and Supply by Various Factors

The demand and supply factors are sensitive to weather. Weather in this case is an exogenous variable because the firm has no control of changes in weather patterns. The demand for sunbest orange juice is highest in hot summer months. When the summer season is approaching, demand for the firm’s products increases rapidly as an increased number of customers demand more orange juice for various reasons. The summer season is characterized by hot and dry weather, which has an adverse effect on the production of oranges. This situation creates a low yield thus making the supply of oranges low. The implication in this case is that hot and dry weather favors demand and centrally to this, supply of the same product is decreased. The situation creates an imbalance between supply and demand. The summer season would therefore be described as a season with low supply of Orange Juice products and high demand in the same juice products. The market situation is that of excess demand and inadequate supply. This case of a market has to undergo a situation of restoring the demand and supply equilibrium. Given the demand and supply functions, it is possible to establish the equilibrium quantity and equilibrium price that would restore the market equilibrium. The demand equation for the sunbest orange juice is given as Qd = 1,000,000 – 25,000,000P + 10 000 000s + 1,600Y + 50,000T. The Supply equation Qs = 8,000,000P – 100,000Pl – 120,000P – 150,000T. The equations make use of price as the major determinant of supply and demand. Supply of sunbest orange price is mainly influenced by weather conditions besides the pricing of the orange juice product. Prices influence the quantity of supply of orange juice from the demand side. The price is increased by the effect of demand being high. The aspect of high demands makes prices to increase. This factor in turn makes the suppliers of demand strive to produce more orange fruits irrespective of the severe weather conditions.

The equations are built on various variables including pricing factors in both average wholesale price for each case of sunbest and the canned soda average price. The demand would decrease with respect to an increase in the average prices. Another factor affecting the demand of demand for sunbest orange juice products is the disposable income of the consumers of the products. Consumers would demand more of the sunbest orange juice when their deposable income levels are high. This would be to a certain point beyond which their disposable income would create a substitution effect in a way that the consumer would wish to combine the consumption of this product and other close substitutes. Disposable income is the income of a consumer after all deductions have been removed. The demand of sunbest juice products is positively by all factors apart from the average price of each case of sunbest orange juice. The variable in the equation is given a negative sign because high prices of each case of sunbest orange juice would lead to low demand while low prices of the juice product would lead to more of the juice being demanded. Canned soda in this case acts like a close substitute. The demand of sunbest orange juice products increases when the price of canned soda increases because as the price of canned soda increases, consumers find it expensive and substitute canned soda for sunbest orange juice products. Close substitutes thus acts in a way that their low demand would lead to an increased demand of the corresponding substitute. High temperatures generate a positive impact on the demand for sunbest orange juice products. It turns out that as the temperatures increase, people demand more of the products than when temperatures are low.

The supply of sunbest orange juice products is influenced by the commodity’s average wholesale price, the price of unskilled labor in its production process in terms of average prices and the risk adjustment capital cost in average. Temperatures as an external condition also influences the quantity supplied of the sunbest orange juice products. The effect of price of the subset orange juice product is positive. The positive impact of prices arises due to motivational effect of producers of the products. Producers of Sunbest Orange Juice would be motivated to increase their production by the high market prices for the product. Producers would increase their production to gain more profits due to the high market prices. The effect is opposite when the market prices of Sunbest Orange Juice products are low. Producer would be discouraged by the low prices and thereby cut their production. In the aspect of average price for unskilled labor, high prices would increase the cost of production in a way that would make producers opt to cut down their production. Producers would increase their production when unskilled labor is cheap. Cheap unskilled labor would generate a higher profit margin than the use of high priced unskilled labor. This aspect implies that the price of labor and production are inversely related. The risk-adjusted cost of capital is another factor that is inversely related to production of sunbest orange juice product. Producers and suppliers of sunbest orange juice products tent to shy off from their production and supply process given the high percentage cost in risk adjustment of capital. Producers would also decrease their production when the temperatures in the environment are high. Temperature decreases the yielding capacity of orange crops.

Given different optimistic values in the case of each variable, the demand and supply quantities can be calculated based on different scenarios.

Environment for Demand P Ps Y T
Optimistic scenario 1 6 5 67500 81.25
2 5.8 4.9 66500 81
3 5.6 4.8 65500 80.75
4 5.4 4.7 64500 80.5
5 5.2 4.6 63500 80.25
6 5 4.5 62500 80
7 4.8 4.4 61500 79.75
8 4.6 4.3 60500 79.5
9 4.4 4.2 59500 79.25
10 4.2 4.1 58500 79

The demand in the first scenario would be given as follows:

Qd = 1000000–25,000,000P + 10 000 000s + 1,600Y + 50,000T

Qd = 1000000 – 25000000*6 + 10000000*5 + 1,600*67500 + 50,000*81.25

=-3,674,522,470,937,500

Scenario 2: Qd = 1000000 – 25000000*5.8 + 10000000*4.9 + 1,600*66500 + 50,000*81.00

=-3,410,076,797,550,000

Scenario 3

Qd = 1000000 – 25000000*5.6 + 10000000*4.8 + 1,600*65500 + 50,000*80.75

= -3,158,233,853,362,500

Scenario 4

Qd = 1000000 – 25000000*5.4+ 10000000*4.7 + 1,600*64500 + 50,000*80.50

=-2,918,659,258,375,000

Scenario 5

Qd = 1000000 – 25000000*5.2+ 10000000*4.6 + 1,600*63500 + 50,000*80.25

=-2,691,021,512,587,500

Scenario 6

Qd = 1000000 – 25000000*5.0+ 10000000*4.5 + 1,600*62500 + 50,000*80.00

=-2,474,991,996,000,000

Scenario 7

Qd     = 1000000 – 25000000*4.8+ 10000000*4.4 + 1,600*61500 + 50,000*79.75

=-2,284,281,096,212,500

Scenario 8

Qd   = 1000000 – 25000000*4.6+ 10000000*4.3 + 1,600*60500 + 50,000*79.50

=-2,076,457,570,425,000

Scenario 9

Qd = 1000000 – 25000000*4.4+ 10000000*4.2 + 1,600*59500 + 50,000*79.25

=2,376,556,548,562,500

Scenario 10

Qd = 1000000 – 25000000*4.2+ 10000000*4.1 + 1,600*58500 + 50,000*79.00

=-1,720,484,621,650,000

Recommendations

From the analysis, the optimum level of demand is at scenario 9. In this scenario, demand will be highest with a combination of all a factors having different values. At this level, the price of sunbest orange juice would $4.4, the price of soda at $4.2, disposable income of $59500, and temperate level of 79.25. Any change of one variable in this case would result to lower demand. Producers should increase their production at this point where temperatures are at neither the highest point nor the lowest point.

 


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