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Christmas ’02 - The relationship between demand and supply.

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Introduction

Christmas '02: The Relationship between Demand and Supply As the year draws to an end, a familiar and relentless barrage of 'sweet deals' are aired on television, magazines, newspapers, billboards, subways and the more interactive media, the Internet. "Zero down payment", "Interest Free Financing", "Fifty percent off", "Unbelievable Sale" and "No payments till 2004" are the slogans that the advertising media belts out. What are the factors that are encouraging suppliers to sacrifice high margins, cut into profits and even sell products at a loss? Consumers aren't buying. And in order to motivate demand, lucrative incentives must be provided. So why aren't consumers demanding products and services? The reason can be attributed to the fact that the current economy is hurling towards an economic depression. Why do people have less money have to spend? The answer lies in the purchasing power of the dollar. Over the years the purchasing power of the dollar has been steadily going down. This translates into goods becoming more expensive. The more expensive the good becomes, the harder it is for people to buy. ...read more.

Middle

Below is a diagram demonstrating this correlation: In this graph we see the law of supply at work: "As supply rises, the quantity supplied rises; as price falls, the quantity supplied falls". This schedule tells us that the more the number of goods supplied results in higher prices being charged. This scenario is great for suppliers as the attain economies of scale and can harvest more profits. As you can see, the supplier supplies 10 units of the good for $250.00 and 25 units of the good for $1500.00. This brings us to "Equilibrium price and quantity". As you can see, there is a conflict of interest between the demand schedule and the supply schedule. This arises more at Christmas time as consumers are on a shopping spree and still want to maximize their dollar to the fullest. The suppliers also know that Christmas time is a time for an increase in sales and hence want to harvest as much profit as they can. Since this is not possible as there is a conflict of interest, comprises are made and a point of equilibrium price and quantity is sought. ...read more.

Conclusion

Looking at changes in supply levels, we can see some of the determining factors. Supply has been affected by prices of the factors of production. Higher resource prices raise production. Improvements in technology and techniques of production enable manufacturers to produce more units with fewer resource bringing overall costs down. Since businesses treat tax as a cost, subsidies are welcome and help in lowering product costs hence increasing sales. Suppliers also lose out on sales to substitute goods. For Example, a soccer ball producer is always under threat from a baseball bat producer and vice versa. Supply is also affected by complimentary goods. Competition also plays a role in supply prices. However, the biggest influencing factor in supply prices is price expectations. Changes in expectations about the future price of a product may affect the producers willingness to supply that product. During the last few years, the US economy has not been doing so well and more and more people are losing their jobs and therefore do not have enough money to spend. The government has been actively trying to rectify this situation by implementing tax cuts, fiscal and monetary policies. ...read more.

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