Business Economics: Termed As Demand And Supply

The most important concept of economics is termed as Demand and Supply. The quantity of a product or service that is desired by the purchasers is termed as demand. The quantity that is offered by the marketers is termed as supply. The relationship between demand and supply motivate the forces behind the distribution of resource.

The factors that will influence the market demand of a farming company specializing in wheat and barley production are as follows:

1. Taste and preferences of the customers – The most important factor that influences the demand of a farming company is the taste and preferences of the customers. If the customers have a great taste and preference for wheat and barley, in that case the demand for wheat and barley will increase. The increase in demand will lead to the increase in the price, as the customers will be ready to purchase the products at the available price.

Figure: Taste and preferences of the customers

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Changes in the price of substitutes – The change in the price of substitute goods will affect the demand of the products. Suppose, there is a shortage of wheat due to bad weather condition, in that case the demand for barley will increase. The price of wheat will be increased and as a result, the supply of wheat will decrease. This will also lead to decrease in the demand for wheat, as the customers will be able to consume barley at possibly cheaper prices.

Income of the people – Wheat is considered as a normal good as the customers find the product as necessity. As a result, the increase in income leads to the increase in demand of wheat.

The number of customers in the market – The demand for wheat and barley will depend on the number of customers in the market. The increase in the number of customers in the market will lead to the increase in the demand for wheat and barley.

The factors that will influence the market supply of a farming company specializing in wheat and barley production are as follows:

Price of the given commodity – If the price of wheat increases, it leads to the increase in the supply of wheat. This is mainly because at a higher price there is a high chance of making profit. This induces the firm to sell more products in the market.

Prices of other goods – If the price of barley increases, then it will affect the supply of wheat. The increase in the price of barley will make it more profitable as compared to wheat. As a result, the supply of wheat will be less as compared to the supply of barley.

Change in technology – The supply in the agricultural product will be affected due to technological advances.

Objectives of the firm – With the objective of profit maximization, the firms will lead to increase in the supply of both wheat and barley.

Price elasticity of demand is used as a measure that shows the responsiveness of the quantity demanded of a good or service due to a change in price. In this case, the price elasticity of demand is inelastic. In other words, a change in price of wheat will have a small impact on the change in quantity demanded. The customers will not reduce the purchases of wheat even if the price rises.  The graph shows an increase in the price of the goods will not affect its demand (Thimmapuram and Kim 2013).

Figure: Inelastic Demand

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A bumper harvest will bring stability in agriculture in both the US and South America. The bumper harvest will take place due to a good monsoon season that will increase the global yield of wheat. This will lead to an increase in the supply of wheat in the market that will in turn shift the supply curve towards the right. This will also have an impact on both equilibrium price and quantity.

Figure: The impact of bumper harvest

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The graph shows that the supply curve S1 and the demand curve DD intersects at the equilibrium point E1. At point E1, the equilibrium price is P1 and the equilibrium quantity is Q1. The equilibrium quantity Q1 is exchanged between the buyers and suppliers. The bumper harvest of wheat shifts the supply curve to the right that is the supply curve increases and shifts to S2 from S1. The new supply curve S2 intersects with the demand curve DD at the new equilibrium point E. The graph shows that the increase in supply leads to fall in price from P1 to P2. Thus, the increase in supply leads to the fall in price and increase in equilibrium quantity. Hence, a bumper harvest in the U.S. and South America increase the global wheat yield (Bowen and Sosa 2014).

Agriculture is known to contribute both positive and negative externality to the society. A particular feature of damage of the negative externality is the damage done by fertilizer used in agriculture to rivers and streams. The fertilizer used in agriculture consists of nitrates and phosphorus that is similar to the leaching process that occurs in pesticides. The introduction of taxes on fertilizer will help in reducing the use of fertilizer. This in turn will reduce the damages done to rivers and streams. However, the introduction of taxes will have a little effect in terms of reduction in quantity. This is mainly because, the price elasticity of fertilizer is low and as a result, the quantity reduction will take place if they are set at higher prices. The receiving environmental condition leads to the variation of damage done by fertilizer (David 2013).

Due to risk-aversion, the farmers can exceed the use of fertilizers. The farmers will prefer to overuse fertilizer rather than underuse them. The tax on fertilizer will lead to the reduction of use of fertilizer but it will not reduce their profits. The profits will not be affected, as there are many technologies that will successfully replace the use of artificial fertilizer.

Figure: The introduction of Tax by the government

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The graph shows that the introduction of tax reduces the efficiency in the economy by causing deadweight loss. On the other hand, when the farmer pays the tax while purchasing the fertilizer, the net benefit of the farmer is reduced. However, the national income is not reduced with the payment of tax. It transfers the income from the farmer to the government. The government to increase the welfare of the society uses the income. With the introduction of taxes, the cost of farmers is increased.

The farming company (Silo Pty Ltd), is a perfectly competitive market as it mostly produces homogeneous products for both sellers and buyers who are well informed about price. The competitive market is characterized by free entry and exit. The producers are mainly the price takers in this market. The farming company has a large number of sellers and as a result, the firm does not have the power to influence the overall supply in the market. The prices are determined by the intersection of the demand and supply curve (Mirman et al. 2015).     

Figure: Perfectly competitive market structure

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The graph shows P denotes the price and quantity is Q. Under the perfect competitive market structure, Marginal Cost exceeds Average Total Cost that is MC exceeds ATC.

Under this market structure, the customers and the producers are well informed about the price. The product acts as a perfect substitute that is barley is a perfect substitute for wheat. In other words, the increase in the price of wheat will increase the demand for barley. Similarly, the fall in the price of wheat will lower the demand for barley. Under this market structure the firms sell their products where the most profit is generated. The third parties are not affected by cost or benefits of an activity under the perfect competitive market.

Bowen, W.G. and Sosa, J.A., 2014. Prospects for faculty in the arts and sciences: A study of factors affecting demand and supply, 1987 to 2012. Princeton University Press retrieved from https://books.google.co.in/books?hl=en&lr=&id=DxIABAAAQBAJ&oi=fnd&pg=PP1&dq=Bowen,+W.G.+and+Sosa,+J.A.,+2014.+Prospects+for+faculty+in+the+arts+and+sciences:+A+study+of+factors+affecting+demand+and+supply,+1987+to+2012.+Princeton+University+Press.&ots=YTjE98pQTg&sig=0Nsmf30zgA-bWD2P6mYCVwNNq2g#v=onepage&q&f=false.

David, M.J., 2013. Tax. MIL, a Matlab toolbox for multiple instance learning retrieved from https://www.david-baias.ro/wp-content/uploads/2015/03/Tax-and-Legal-Alert-no-38_DB_EN.pdf.

Mirman, L.J., Salgueiro, E. and Santugini, M., 2015. Learning in a Perfectly Competitive Market retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2501419.

Thimmapuram, P.R. and Kim, J., 2013. Consumers’ price elasticity of demand modeling with economic effects on electricity markets using an agent-based model. IEEE Transactions on Smart Grid, 4(1), pp.390-397 retrieved from https://ieeexplore.ieee.org/document/6461495/.