Session 6

COMPETITIVE ANALYSIS AND STRATEGY

Session: 6 Analysis of international competitiveness: Analysis of demand and supply

Production decisions

Pricing Strategy

Why do businesses need to understand supply and demand?

Both are the cornerstones of microeconomics and represent the forces that determine prices and quantities in the market. Supply refers to the number of products or services that producers are willing and able to sell at different price levels. Demand, on the other hand, indicates the amount of a product or service that consumers are willing to purchase at different price levels. The interaction of supply and demand in a competitive market result in a price-quantity equilibrium where the quantity supplied is equal to the quantity demanded. When supply exceeds demand, prices tend to fall; when demand exceeds supply, prices tend to rise.

Supply, demand and elasticity

Supply and demand are fundamental concepts in economics that play an important role in shaping market dynamics and influencing business decisions. Understanding these concepts is important for businesses as they guide pricing strategies, production decisions, and market positioning. In this essay, we will explore the meaning of supply and demand, the concept of product elasticity, its different types, and why businesses need to understand these concepts for effective decision making.

Income Elasticity of Demand (YED)

Product Planning

Pricing Strategy

Price Elasticity of Supply (PES)

Why do businesses need to understand elasticity?

Price Elasticity of Demand (PED)

Elasticity measures the responsiveness of quantity demanded or supplied to changes in price or other factors. Understanding resiliency is critical for businesses as it provides insight into consumer behavior and market reactions. There are different types of elasticity.

A firm understanding of the concepts of supply, demand, and elasticity is essential for businesses operating in today's dynamic and competitive markets. These economic principles enable companies to make informed decisions regarding pricing, production, and market positioning, ultimately contributing to long-term success and sustainability. The ability to adapt to changing market conditions and consumer preferences relies on a fundamental understanding of these economic forces, making them essential tools in the business toolkit

PES measures how sensitive the quantity supplied is to changes in price. A high PES indicates that producers can quickly adjust production to changes in prices, whereas a low PES indicates limited flexibility. For example: For agricultural products such as wheat, supply is often unstable in the short term because farmers need time to adjust planting and harvesting.

Understanding income elasticity can help with product development and targeting appropriate consumer segments based on income level.

Manufacturers must consider the demand for their products when determining production quantities. Overproduction can lead to excess inventory and increased costs, while underproduction can lead to lost revenue opportunities

Knowledge of price elasticity helps companies make informed decisions about price changes. For elastic products, a price reduction can lead to a significant increase in sales, while for inelastic products, price adjustments may be necessary to maximize profitability.

PED measures how sensitive the quantity demanded is to changes in price. When PED is greater than 1 (elastic), a small change in price causes a proportionally large change in quantity demanded. When PED is less than 1 (inelastic), changes in price have a relatively small effect on quantity demanded. Example: Luxury goods often have elastic demand because consumers are more sensitive to changes in price. Basic needs such as food are typically inelastic in demand.

Businesses need to understand the principles of supply and demand to set the optimal price for their products and services. Understanding these concepts will help you determine the right balance between price and quantity to ensure profitability and competitiveness in the market.

YED measures how changes in consumer income affect the demand for a product. A positive YED indicates a normal good whose demand increases with income, and a negative YED indicates an inferior good. For example: Luxury cars typically have a positive YED, while generic private label products may have a negative YED.