Question:
Discuss about the International Monetary Fund.
The International Monetary Fund in its 2017 report has stated that the decrease in the prices is not the only affect that affects the profitability of the firm. Conditions such as recession also have an effect on the purchasing power of the customers. If the economy is down in a particular place, it would simply mean that the purchasing capability of the buyers will decrease to a large extent. This would also affect the profits of the firm, as the decrease in the prices of the commodities will not help in increasing the consumption of the commodity (Rios McConnell and Brue 2013). The relationship between the sellers and the buyers of the commodity helps in determining the prices of the commodity, which will create an impact on the profitability of the organization. The elasticity in the prices of the commodity helps the firms in earning better profits, as the number of units of the commodity that will be sold will be high. The inelasticity in the price of the commodity will result in the purchasing of the substitutes by the consumers, which would have a negative impact on the profit of the firm.
While risks are around the global growth expectation appears broadly balanced in the short term, they remain stick to the downside over the medium term. Connor in his article in the magazine had stated that the consumers of the product needs to have a better understanding of the dynamics and the specificities that are present in the market, which will help in setting up of the perfect competition in the market. The article by the author helps in identifying the impact that will be created on the customers and the businesses due to the decrease in the prices (Varian 2014). On the other hand, Most of the customers are looking for a decrease in the prices in larger assets such as homes and apartments so that it can be beneficial for the customers along with the basic necessities such as clothing and food (Finance & Development | F&D2017). Monetary policy to bring in normal state in some advanced economies, specially the United States, can trigger a faster than expected fiscal model in global financial conditions. The other risks were discussed in the April 2017 ‘World Economic Outlook’ including a turn towards internal looking policies and political risks, remain noticeable.
According to the theory of microeconomics, the amount of a product in the market is known as supply, and the amount customers want to buy is the demand. For example, a certain good, such as potato, if there is an increasing demand for French fries, but there is less potato, then the price eventually goes up (Varian 2014). If conditions change and there is a smaller demand for potato, for instance if everyone started avoiding French fries to stay away from obesity, or the good becomes suddenly available, for example, many farms started growing potatoes, then the price of the good decreases. The article ‘Supply and Demand: Why Markets Tick’, says that the relation between the price and demand of the commodity is inversely proportional to each other, as the increase in the price of certain commodities will decrease its demand in the market place. The use of the rational model of expectation is an important part of the business, as it is related to the oversimplification of the business processes. The increase in the prices of the commodity will not always mean the decrease in the demand of the commodity, as the quality of the product also needs to be tested. These dynamics need to be seen by the business so that it can be successful in the market place (Anon 2017). After the economic revolution, the expectations of the people with the variables in economy have helped in influencing the behaviors that are related to purchasing. The drop in the prices of the commodity helps in increasing the demand of that particular product. The consumers of different economic backgrounds will be able to satisfy their needs by purchasing the commodity at an affordable price.
Prices can vary for many reasons like, technology, preferences of consumer, weather conditions. The relationship between the supply and demand for a product or service and changes in price is known as elasticity (Balk 2013). Products that are non-elastic are relatively unfavorable to changes in price, whereas elastic products are very sensitive to price. The best example of a non-elastic product in case of the short term is energy. Consumers need energy to get to the product and from work and to heat their wallets. It is difficult in the short term for them to buy cars or houses that are related to more energy efficiency (Cao, Wan and Lai 2013). On the contrary, demand for many products is very responsive to price. In case of steak, if the price of steak rises, it would lead the consumers to buy a cheaper type of beef or switch to another category of meat. Hence, steak is an elastic product.
The article ‘Supply-Demand Market Equilibrium’ says about the farmers market. At a farmers market where, the farmers were selling watermelons. On the very first day, the farmers were selling their watermelons at $5 per piece, but very few customers bought them, so as the day gradually proceeded, the farmers found that they had an excess amount of watermelons (Huang, Yang and Zhang 2012). Finally, the farmers lowered the price of their watermelons to $1 from $5, all their products sold out. It is seen that, as the price of the product increases, the supply of the product increases but the demand of the product decreases. If the sellers hike their price too high, but the demand is less than what they actually offer, then they will only have a surplus of products that will force them to lower their price until the entire supply is sold out.
On the contrary, if the sellers priced their products too low, then there is a chance that their entire supply is sold out before they can fulfill the demands of the market, hence it would cause a deficit for the consumers and lesser profits or greater losses for the sellers. The customers who wanted to buy the product would be unable to obtain it (Giri and Bardhan 2012). It is evident that supply and price are proportional to each other. Supply of the products increases with the price as the suppliers get greater profits and can easily earn their costs. Theoretically, the demand increases when the price in the lower side as the products appear more affordable and the customer`s value of money is promised (Dionne and Santugini 2014). The customer tends to buy a product if the product gives equal benefit to its cost, and as customer`s preferences vary largely, a product with lower price will have a value which is worth the product cost for more customer, thus the demand increases (Goetzmann, Kim and Shiller 2016). This is the reason when the demand of a product and the supply of the quantities of the product are set according to the price, then in the graph the curve, which indicates supply goes upward with the price, whilst the demand curve goes downward with the price curve. The equilibrium is achieved only when the demand of the amount is equal to the supply of the amount. It is known as the equilibrium of the market, where the surplus quantity is equal to quantity of equilibrium also the range of the price is equal to the price equilibrium. Additionally, if the cost prices are different from the price equilibrium, then the mode of demand and supply indicates that the price of a product always adjusts until the supply meets the demand.
The author of the journal ‘The Journal of Economic Perspectives, also supports the rationing model most likely after the economic revolution where customers held a lot of anticipations related to economic variables for future. The rational model supports the fundamental behaviors of purchase. It is already discussed that when price drops, the buying tendency increases. Customers rush down to the nearest stores to satisfy their needs because the products become affordable for a certain span of time. With the increase of price the demand decreases as customers refrain themselves from buying goods as the price of the product is too high to reach. Hence, the profit does not increase with the price in respect to buying behaviors.
From the above discussion the essay provides an idea about the consumer`s buying behaviors towards buying a product. The essay says that the facts about economic growth and the relationship among price, demand and supply it is evident that market equilibrium is essential to sustain in the profit zone (Weimer and Vining 2017). On the contrary if the price is increased the supply curve goes up but the demand curve goes down, hence leads to a loss rather than profit.
References
Anon, (2017). [online] Available at: https://www.nytimes.com/2017/02/10/upshot/popping-the-housing-bubbles-in-the-American-mind.html [Accessed 9 Sep. 2017].
Balk, B.M., 2013. Industrial price, quantity, and productivity indices: the micro-economic theory and an application. Springer Science & Business Media.
Cao, E., Wan, C. and Lai, M., 2013. Coordination of a supply chain with one manufacturer and multiple competing retailers under simultaneous demand and cost disruptions. International Journal of Production Economics, 141(1), pp.425-433.
Dionne, G. and Santugini, M., 2014. Entry, imperfect competition, and futures market for the input. International Journal of Industrial Organization, 35, pp.70-83.
Finance & Development | F&D. (2017). Finance & Development. [online] Available at: https://www.imf.org/external/pubs/ft/fandd/basics/suppdem.htm [Accessed 9 Sep. 2017].
Giri, B.C. and Bardhan, S., 2012. Supply chain coordination for a deteriorating item with stock and price?dependent demand under revenue sharing contract. International Transactions in Operational Research, 19(5), pp.753-768.
Goetzmann, W.N., Kim, D. and Shiller, R.J., 2016. Crash beliefs from investor surveys (No. w22143). National Bureau of Economic Research.
Huang, S., Yang, C. and Zhang, X., 2012. Pricing and production decisions in dual-channel supply chains with demand disruptions. Computers & Industrial Engineering, 62(1), pp.70-83.
Obizhaeva, A.A. and Wang, J., 2013. Optimal trading strategy and supply/demand dynamics. Journal of Financial Markets, 16(1), pp.1-32.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
Spaulding, W. (2017). Supply-Demand Market Equilibrium. [online] Thismatter.com. Available at: https://thismatter.com/economics/market-equilibrium.htm [Accessed 9 Sep. 2017].
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.
Weimer, D.L. and Vining, A.R., 2017. Policy analysis: Concepts and practice. Taylor & Francis.
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