Explaining Key Economic Price Determinant Factors Economics Essay

First portion ( a ) of this essay will concentrate on explicating cardinal economic monetary value determiner factors such as demand and supply of goods and services with some existent clip illustrations, while in 2nd portion ( B ) we shall see the disequilibrium created due to the deficit of cotton supply and besides examine assorted options that will enable retail merchant to go through on the cost to client ( s ) in order to protect their net income border.

Economic Price Determinant Factors:

Price finding is nil but a perfect balance of demand and supply. As summarized by Begg & A ; Ward ( 2009 ) , the’law of demand ‘ provinces there is a negative relationship between the measure demand and monetary value, whereas ‘law of supply ‘ provinces there is a positive relationship between the measure demand and price.Figure 1.0 and Figure 1.1 below depicts the alteration in demand and supply curve with regard to monetary value and measure of merchandise ( Begg & A ; Ward, 2010 ) .

Elasticity of demand in two different Market construction as summarized by Miller & A ; Fishe ( 1999 ) is shown below.


Perfect Competition ( Price Taker )

Imperfect Competition ( Price Maker )

Elasticity of Demand

Demand is absolutely Elastic, as shown in Figure 1.3

Depending on the entire gross curve and demand curve shown in Figure 1.2 snap and inelasticity scope can be determined.

( Beginning: Adopted from Miller & A ; Fishe 1999 )

Miller and Fishe ( 1999 ) says, there are cardinal demand and supply thrusts which affects the monetary value of goods and service, as shown in Figure1.4.

Quality of merchandise can find the monetary value of goods. In fact a house bring forthing high quality merchandises expands new client base due to client referrals and elaboration of positive word of oral cavity ( Miller and Fishe 1999 ) . This will in bend multiply overtime as the concern grows and besides will take to increase in demand for the merchandise or service. Besides, gustatory sensation and penchant affects demand for a peculiar merchandise ( Begg & A ; Ward 2009 ) . For illustration, a client who does n’t wish to add butter to his basic diet will devour less of it than person who does like butter. Later upon wishing, his penchants may alter in favor of butter and it supplements the demand for it to switch inward and eventually impact the monetary value of the merchandise as shown in Figure 1.4. Similarly, the consequence on monetary value can be either due to short tally or long tally depending upon the type of goods. For luxury good there will be short term displacement in demand due to alter in life manner while necessity good tend to hold stable or long tally demand curve.

( Beginning: Begg & A ; ward 2009 )

Coming to correlativity of income to demand, when consumer income additions, disposable income additions and of course it alters the ingestion form ( Begg & A ; Ward 2009 ) . This alteration in ingestion form affects the demand of the merchandise and consequently its monetary value. Demand for normal merchandises are more during roar when consumer income additions, whereas during recession the income falls, ensuing in clients choosing for inferior or less superior merchandises. Figure 1.6 illustrates the alteration in concern rhythm and high spots flow of money during recession and roar.

( Beginning: The Investor 2009 )

Predicting monetary value of rival is the key in finding monetary value of goods to pull a client base. For case in Bradford, NOMI Mobile card is being widely used by expatriate pupils to do inexpensive calls ( 3p per min ) to India and it besides allows call charge of 1p per min between 6AM and 6PM. But subsequently, competition stiffened with Lyca come ining this market infinite and started supplying SIM at a competitory monetary value of 1p for international calls. This attracted many expat pupils in taking a utility merchandise in Lyca. So, in big market structures cognizing the monetary value of rival holds the key in finding the monetary value of an tantamount merchandise. Thus the handiness and the monetary value of rivals affect the demand and eventually drive the monetary values ( Begg & A ; Ward 2009 ) . On the other manus demand for a merchandise varies over different phases of a Product Life Cycle ( Lowes 2010 ) .

During each phase the figure of rivals is different, so this leads to replaceability and differing snap ‘s of demand. As shown in Figure 1.7, during launch of a merchandise, the demand invariably increases whereas during adulthood and worsening phases the demand falls and hence monetary values will besides follow the demand.

Figure 1.7

( Beginning: Sivers, D 2009 )

Similarly engineering can besides impact the supply and alter the monetary value consequently ( Begg & A ; Ward 2009 ) ; infact supply curves are drawn presuming a given engineering. In this modern universe, engineering alterations overnight due to multiple inventions, every passing twenty-four hours you can happen new nomadic phone theoretical accounts or LCD, LED telecasting hitting the electronic shops. So to undertake this, if good innovative techniques are followed so supply curve will ever switch towards higher production which in bend can run into the of all time turning consumer demand. For illustration the supply for Walkman ‘s were high during the ninetiess and even in early 2000 but with the innovation of MP3 Players and i-Pods, the demand for them dropped along with the monetary values of those merchandises and supply, which finally wiped them out of the market ( Lowes2010 ) .

On the other manus monetary value of resources can change the demand for a merchandise ( Miller & A ; Fishe 1999 ) , perfect illustration for this would be, in Middle East monetary value of gasoline is inexpensive compared to Asia, particularly in India.

This is due to easy handiness of rough oil in Gulf States complimented by natural resources. As a comparing, current gasoline monetary value in Bahrain is 100fills ( tantamount to INR 12 ) whereas in India the same gasoline monetary value is INR 47.93. If we further analyse the existent cost of gasoline in India during the same period it is INR 26.34, but when we add all authorities revenue enhancements ( Press Information Bureau 2010 ) in: –

Excise responsibility: INR 14.35

Customss responsibility: 7.5 %

Gross saless revenue enhancement or Value-added tax: 20 %

it comes to 47.93 rupees per litre, which is the cost of gasoline in Delhi ( as of April-2010 ) . So, Taxes can besides alter the market equilibrium monetary value and measure as shown in Figure 1.8.

Figure 1.8 above predicts the market equilibrium monetary value and market measure of the apple varies due to alter in revenue enhancement. ( Miller & A ; Fishe 1995 ) .

Rush in Cotton Price making market disequilibrium:

Following transition will discourse the ground for rush in cotton monetary value due to market disequilibrium.

Market Disequilibrium: Supply Deficit

As universe cotton land area has declined, production has fallen to 15.3 % in 2009/2010 harvest twelvemonth compare to 2004/05 ( Lifestyle Monitor 2010 ) . Due to worsen in cotton production, predicted cotton supply is far below than existent demand. The figure 2.1 shows fluctuation / chiefly lessening in cotton stocks as a % of ingestion over the past several old ages, but the higher monetary values are expected to drive significant addition in cotton production in 2010/11. Once production is realigned with demand, cotton monetary values should travel back towards their long-run norms as explained in Figure2.1 ( Lowes 2010 ) .

Figure 2.0

( Beginning: Meyer 2010 )

Figure 2.1

However for cotton, the most of import monetary value driver is a supply deficit from China and Pakistan ( WASDE Report. 2010 ) , as showed in figure 2.3. This deficit can be overcome by increasing the monetary value of cotton which in bend accelerates the cotton production and finally increasing the supply to fit with market demand and create market equilibrium.

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Figure 2.2 Figure 2.3

Figure 2.2 above depicts demand for cotton among retail merchant outpaced cotton production which resulted in demand and supply deficit.

Besides, surging cotton monetary value builds up force per unit area on manner retail merchant market and as a consequence of which, NEXT warns the addition in monetary value of garment between 5 % and 8 % and it was predicted to hit the entire gross revenues by 1-2 per cent ( Meyer. 2010 ) . As illustrated in figure 2.4, this state of affairs creates inelastic demand, which indicates, for any alteration in monetary value at that place will ever be a little alteration in measure demanded.

Figure 2.4

During monetary value rise most of the consumers will seek to cut down their outgo by merely cut downing the measure without compromising on the quality of merchandise. So retail merchants while increasing their monetary value must concentrate on merchandise distinction which increases the demand for their merchandise and besides secernate monetary value depending on consumer gustatory sensation and penchant.

Say for illustration, even if Following increases its monetary value by 8 % ( Meyer 2010 ) , there are certain group of client who would still prefer to purchase NEXT merchandises, so in such state of affairss retail merchants can bring forth gross by increasing the gross revenues of such branded merchandise by separating the monetary value across low income and high income bring forthing clients. Below figure 2.5 ( Miller & A ; Fishe 1995 ) , illustrates the state of affairs where demand for merchandise in market A ( low income consumer ) is elastic whereas in market B demand for the merchandise remain inelastic ( high income consumer ) .Profit maximization occurs when MC=MR.

Figure 2.5

Product distinction is another technique which can be used to increase demand for the merchandise and maximise net income ( Miller & A ; Fishe 1995 ) . From figure 2.6 it can be observed that company will bring forth net income by selling 200 shirts at $ 25 for distinguishing their merchandise by altering the design of shirt, but in monopolistic competition other houses try to vie by conveying new design to the market, in such state of affairs demand curve will switch left and touches the Average Entire Cost as shown in figure 2.7 therefore house in this instance will non bring forth any profit.Though merchandise distinction is a key to gross coevals, advertisement is another factor which most of the manner retail merchant usage to get some grade of market control and increase demand during monetary value rise.

( Beginning: Miller & A ; Fishe 1995 )

Alternate option for retail merchant and maker is to cut down the cost and exchange to semisynthetic fibres such as polyester, man-made linen, rayon and man-made fibre alternatively of trusting on 100 % cotton stuff. To accomplish this, retail merchant and maker must follow the “ Just in Time Management ” scheme and discuss about the sum of cotton proposition required for the peculiar stuff without compromising on the quality of the merchandise ( Clifford, S. 2010 ) . This option to some extent reduces the mean entire cost and fringy cost and improves net income border during monetary value rise.

To reason, while this essay focal point on the cardinal economic monetary value determiner factors with existent clip examples it besides examines state of affairss that allow the client to go through on cost addition and assorted factors such as monetary value favoritism, merchandise distinction, and advertisement can let manner retail merchant to retain their net income border. In existent clip, though options provided may non supply a applicable consequence to increase the net income, it can to some extent allow the house to keep their net income border when the monetary value of the good additions.