Introduction
Several components interplay within the market to ensure business is conducted effectively. These include supply and demand, which are natural forces, and price controls, such as price ceilings and floors. This essay interrogates these factors and their interplay in the business environment. Understanding them is crucial in ensuring business activities are conducted optimally and that a healthy business environment that benefits both business people and consumers is maintained.
Macro Market System and Circular Process
The macro market system encompasses the flow of services, goods, and finances among nations, leading to economic growth and development. The circular process entails production leads to consumption, thus generating income for individuals and businesses (Henderson 30). It, in turn, leads to further production as people are motivated to use goods and services. Government policies, international trade agreements, and financial markets powerfully shape the macro market system. This system relies on balance and cooperation, ensuring continuous activities to produce more goods and services.
Limits Alternatives and Choices
Limits encompass the restrictions on time, money, and other crucial factors in decision-making. They are often scarce, making it challenging to satisfy human wants in decision-making. For example, a limited amount of land, labor, capital, and natural resources are available for producing goods and services. Alternatives encompass the options people, governments, or other institutions have to satisfy human wants (Griffin et al. 231). It represents how various resources are used to meet human desires. When faced with limited resources, decision-makers must consider multiple alternatives based on preference and objectives. Choices encompass selecting one or more options to allocate resources efficiently.
Supply and Demand
Supply refers to the quantity of goods and services sold by producers within a particular market, for a specific cost, and during an exact time. Henderson postulates that the law of supply requires that if the price of a good or service increases, suppliers produce more of that commodity if all other factors remain constant (12). Demand refers to the quantity of goods and services consumers are willing and capable of purchasing at a specific time and for a particular price (Henderson 12).
The law of demand postulates that declines in the price of a commodity are followed by increased demand if the other factors remain unaffected. Demand and supply are complementary within the market and determine the price of an item that prevails within a particular setting or economy. The equilibrium price is the meeting point of a specific product’s demand and supply. It becomes the prevailing price consumers are willing to pay for a good or service, and suppliers are eager to produce it.
Shifting Supply and Demand
Other than cost, other factors influence the supply and demand of specific goods within a market. These factors cause the demand or supply of a product to shift, such that at a similar expense, more or less of the service is supplied or demanded. Factors that cause the shift in demand for an item include the change in consumer income, the cost of related goods, and customer preferences. Others include population changes, expectations of future prices, advertising and marketing, government policies, and seasonal factors.
Changes in consumer income cause a shift in the demand for a product because, with improved revenue, consumers have more disposable income. This causes more demand for luxury items by these customers (Kidane and Brækkan 294). During economic downturns, people demand fewer luxury items, and the essential items experience an upsurge in demand. Costs of related goods impact the demand for a thing if they are complementary or alternative. An example of alternative goods is beverages such as coffee and tea, where an addition in the expense of one causes improved demand for the other. Complementary goods include automobiles and gasoline, where an upsurge in the cost of cars causes diminished demand for gasoline.
Expectations of future expenses rise for certain goods; for example, inflated fuel costs raise current demand. Advertising and marketing can positively impact the market for a particular product, such as smartphones. According to Kidane and Brækkan, companies advertising their devices online experience expanded demand for that model (297). Government policies such as subsidies for electric vehicles improve the need for this environmentally friendly mode of transport. Seasonal factors such as weather and climate change influence the demand for specific products. An example is sunscreen, which experiences boosted demand during summer or sunny conditions in countries with these seasonal shifts.
The supply of goods and services within an economy experiences a shift depending on certain crucial factors. Supply shifts are caused by changes in production costs, technological advancements, input costs, expectations of future prices, government regulations, weather, subsidies and grants, and geopolitical events (Smith). Changes in production costs are impacted by the cost of raw materials required for the manufacture of that commodity.
If the price of microchips necessary for the manufacture of smartphones rises, production costs will rise, and a consequent reduction in their supply will occur. Technological advancements impact the supply of goods and services by making the production process more efficient. More efficient machinery, for example, in producing solar panels, reduces the cost of production and grows their supply.
The prices of inputs cause shifts in the production process, such as the expense of steel in the automotive industry. An addition in the price of steel in the market causes a rise in the production expenses of vehicles, causing a decline in their supply. Expectations of future costs cause shifts in the quantities supplied to the market by increasing or causing a reduction (Smith). An example is when farmers become informed of a disease affecting oranges and decide to sell larger quantities in the market to avoid losses, increasing their supply. Government regulations can encourage producers to raise or lower their production to either improve the amount of that commodity in the market or drop it.
Weather situations affect the supply of certain commodities, primarily agricultural products. Smith postulates that weather conditions favor agriculture, and farmers reap a bumper harvest, increasing the supply quantity within a market. Subsidies and grants affect the production of renewable energy sources, encouraging manufacturers of solar panels and wind turbines to release more into the market.
Price Ceilings and Floors
Price ceiling refers to the maximum set price by a government below the equilibrium price of a particular market. A price ceiling is usually set to protect consumers, especially low-income earners, from traders’ exploitation, making essential goods and services affordable (Fabianto et al. 359). Carrea and Skarberg define a Price floor as the minimum price the government sets above the equilibrium cost to ensure producers receive reasonable income for their products.
Price floors are more common in some markets than others, with the agricultural sector being more prone to this regulation. The government offers agricultural price support for wheat, corn, or dairy products. Minimum wage laws establish a minimum wage for the workers paid for specific labor, preventing exploitation and ensuring people have a decent standard of living.
Price floors have inevitable consequences, which include surpluses, wasted resources, costs to the government, and inefficient allocation. If the floor is set above the equilibrium price, excess supply exceeds the demanded quantity, and suppliers need help to dispose of their products. Wastage of resources occurs when producers may have to dispose of or store the excess goods. The government incurs additional expenses by buying the surplus from the suppliers, which may require more significant taxation revenue or subsidies.
Ceilings are more common within the housing sector, where there are limits to the amounts a tenant can charge for specific units. This ensures that residents within a particular region can access affordable housing. According to Hernandez and Garcia-Vigonte, some countries set the maximum retail price for certain essential products, such as food items and medicines, ensuring the citizens are not exploited.
Shortages occur when there is increased demand at a certain amount, and suppliers cannot meet that price. Black markets arise because the shortage allows them to meet the additional demand. Reduced quality is due to restrictions on the profit margins likely accrued by the suppliers, causing them to offer substandard goods and services. Inefficient allocation occurs when the natural market allocation mechanism is disrupted.
Conclusion
In conclusion, supply and demand are supreme in determining the prices of goods and services when the equilibrium value is determined. The shift in demand and supply is when a different quantity is demanded or supplied at the same price. Price controls include ceilings and floors, and they affect the market’s ability to operate independently. Understanding these concepts is crucial in comprehending business and engaging in fruitful business ventures that protect the consumer and ensure the provider is rewarded for their business engagements.
Works Cited
Carrea, Marco Jenssveen, and Lars Olav Skarberg. “The Price Floor Phenomenon in the Norwegian Meat Industry: The Impact of Market Dominance.” UIA Brage Unit. 2023. Web.
Fabianto, Ag, et al. “The Impact of Price Ceiling and Price Floor Implementation towards Indonesia Scheduled Commercial Air Transport.” Advances in Transportation and Logistics Research, vol. 2, no. 0. 2019, pp. 355–361. Web.
Griffin, Ricky W., et al. Business. Pearson Canada, 2019.
Henderson, Hubert D. Supply and Demand. Nisbet, 2020.
Hernandez, John Randolf, and Florinda Garcia-Vigonte. “The Government Intervention in Price Mechanisms.” SSRN Papers, 2022. Web.
Kidane, Dejene Gizaw, and Eivind Hestvik Brækkan. “Global Seafood Demand Growth Differences across Regions, Income Levels, and Time.” Marine Resource Economics, vol. 36, no. 3, 2021, pp. 289–305. Web.
Smith, Norm. “3.7 – Changes in Equilibrium Price and Quantity: The Four-Step Process.” Labour Economics for Leaders, 2023. Web.
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