Demand and Supply of Soft Drinks - Essay Example

?Introduction In this paper the fundamental concepts of demand and supply of soft drinks are defined with the help of diagrams. This paper also includes the shift in the market of soft drinks and the competitors that are available in soft drink market and the reasons for the shift of buyers from one product to another. It will also focus on comparing the perfect market with monopolistic market and the assumptions related to such market i.e. number of firms in the market, types of products offered by each firm, entry and exit to the industry and firm’s influence over price. Supply, Demand, and Equilibrium: Supply and demand is the main concept on which whole study of economics is based. The demand is known to be the quantity asked by the consumers or buyers and us usually backed by the ability and willingness to purchase the product. Demand has an inverse relation with the price which means that when the price of soft drink increases, it would eventually decrease the demand of soft drink. On the other hand, Supply means the quantity of the products offered by the industry or market at a certain level of price. Supply has a direct relation with price which shows that whenever the price of soft drink increases the supply will also increase. Equilibrium is a state where the demand and supply are equal. It means that the amount of soft drink being supplied is equal to the amount that is demanded by the buyers (McEachern, 2012). The diagram shows that equilibrium occurs when the demand and supply of the product is equal. This is the most favourable position as this is the most efficient point for an industry to be at. It means that the demand of the product is equally matched with the supply of the product (McEachern, 2012). Soft drinks are included in monopolistic market where the number of firms that operates in the market are many and provides differentiated products to the buyers. These products are not identical but are differentiated and each soft drink in the market is clearly differentiated from others. Entry and exit in this market is easy creating shifts in the market (McEachern, 2012). The possibility of shifts in demand and supply are as follows: Demand Changes in price When the price of soft drinks increases the demand for soft drinks will eventually decrease which means that the buyers will reduce their purchases. On the other hand when the price of the soft drink decreases the demand will rapidly rise. This shows that price has an inverse relation with demand which means that rise in price will lead to fall in demand (Taylor and Weerapana, 2009). Availability of substitute goods Demand is inversely proportional to the availability of substitute goods. This means that increase in substitute goods will decrease the demand of soft drinks. The more substitute products become available in the market the less is the demand for the product (Taylor and Weerapana, 2009). Changes in income The demand for soft drinks can also be affected by changes in the income. As income rises the demand for the soft drinks will ultimately increase and the demand curve will shift to right side. Similarly, when the income decreases the demand for the soft drink will decrease and the curve will shift to left side which shows deficit (Taylor and Weerapana, 2009). Supply Changes in price of goods When the price of soft drinks increases the supply for soft drinks will eventually increase (Taylor and Weerapana, 2009). Changes in price of related goods When the price of related goods increases the supply for soft drinks will eventually increase as there will be more demand for the soft drinks (Taylor and Weerapana, 2009). Changes in price of inputs The price of the inputs or ingredients used to produce soft drinks also causes the supply curve to shift. An increase in price of inputs will ultimately decrease the supply of soft drinks from the suppliers. This will be done to cover up the cost incurred by the suppliers due to increase in the prices of the inputs. Similarly, decrease in the price of inputs will reduce the cost and increase the supply of soft drinks to the market (Taylor and Weerapana, 2009). Changes in technology Advancement in technology means that the cost of production would be lowered due to which the suppliers can supply more goods at given price (Taylor and Weerapana, 2009). Introduction of plastic bottles reduced the supply of bottles because plastic bottles were cheaper as compared to old glass bottles. Profits in Perfect Competition In this short run there are possibilities to earn supernormal profits but for a limited duration as when new firms enter the market the demand curves shifts to the left indicating elasticity due to which the prices are lowered which erodes all the supernormal profits. But in the long run there is no chance of supernormal profits as the competition increases due to which the firm is left with only normal profits. The profit ratio in long run is lower than the short run due to which the firm tries to remain in the short run by innovating the product and further product differentiation (McEachern, 2012). Comparing Perfect market and Monopolistic Competition Market The perfect competition is characterised by large number of firms which are offering homogeneous or identical products to the consumers. It means that the competition in this market is tough as there are close alternatives available in the market for the customers. They can choose any product according to their preference. There are no restrictions for new entrants in the market and anyone can enter the market freely. The price in this market is set by supply and demand situation and all the firms in this market act as price takers rather than price makers. The products in this market are sold at similar price because if there is any change in the price, the customers would shift to those products that are cheaper than the others (McEachern, 2012). In a monopolistic competition market where soft drinks operates; there are great number of buyers and sellers that offer differentiated and unique products. These products are not homogeneous because each product has their special and unique taste that separates each product from one another. In soft drinks industry each of the products is classified according to their taste difference and the cost of production. The products in this market are considered to be close substitute for one another but not identical. This market structure is somewhat similar to perfect competition because both the market structures have many buyers and sellers and entry and exit in this market is quite easy but the type of product separates both the market. The demand curve in this market is negatively sloped which means it has negative relationship with prices but at the same time is relatively elastic. Soft drinks cannot be charged with higher price because of the fact that there are many close substitutes available (Taylor and Weerapana, 2009). Conclusion Thus, it can be concluded that the demand and supply play an integral role in the success of soft drinks. It has been analysed that whenever the price of soft drinks increased it had negative impact on the demand of the customers and the customers reduced their purchases but by decreasing the price of soft drinks the demand increased and this in turn increased the sales. It shows that demand and price are negatively proportional and if one increases the second will eventually decrease. Some of the factors that impact the demand are changes in price, availability of substitutes and changes in the income. Supply and price are considered to be directly proportional. The Increase in the price of soft drinks results in increasing the overall supply. Some of the factors that impact the supply are the changes in technology, price of the inputs and the price of related products. List of References McEachern, W. (2012). Economics: a contemporary introduction. Mason, OH: South-Western Cengage Learning. Taylor, J., and Weerapana, A. (2009). Economics. Boston, USA: Houghton Mifflin Company. Read More