Demand and supply of goods may be affected with the consideration of price fluctuations. If the goods are competing for the market, the changes in the demand and/or supply of either commodity will depend on the management decisions made by producers, with respect to countering the competition edge introduced by a competitor. Demand in one commodity also depends on effect one good over the other; are the goods complementary or substitutes? Considering the case of substitute goods, where technological advances are a factor that creates a difference in the two goods, customer indifference to the two competing goods will depend on the prices that the two competitors are willing to offer on market, and hence the choice of the customer between the two goods.We will write a custom Managerial Economics specifically for you
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What would happen to the supply of pens?
The supply of pens will depend on the producers of the pen. If we consider the two, that is, pencil and pens are perfect substitutes; the technological breakthrough in the production of pens, the cost of production of pens comes low. Every business aims at minimizing costs while maximizing revenues. If in the first case, and before the technological breakthrough in the production of pens, and considering the prices of the two were fairly different, the consumer’s choice between pens and pencils was directed by a reduction of prices of the pens or pencils. The present case has given the producer of pens an opportunity to produce at lower costs; therefore, reduction in the prices of pens is inevitable. The total end effect is on the supply; since many pens can be produced per unit cost in comparison to the previously produced there will be mass production of the pens in anticipation of high demand. Demand and supply have a relationship that an increase in supply causes a drop-in-prices hence prices will also come down. In a nutshell we, expect the supply of pens to rise.
What would happen to the price of pens and the quantity demanded for both pens and pencils?
The price of the pens will drop. The factor that mostly dictates the end price of a commodity is the cost of manufacturing of the given good, if demand of the good is assumed to be constant. In the case of the pens above, technological breakthrough has enabled the producer to lower the cost of production, and mentioned above, if the cost of production of a pen has come down, the expected effect is that the prices of the pens will come down as a result of low production costs.
With respect to the demand of the two, banking on the assumption that there is no technological advance in the production of pencils, and that the pen remains a perfect substitute for the pencil, the quantity demanded for pens will increase with respect to the perceived reduction in the prices of the pens, as shown in the figure below.
The relationship shows that a decrease in prices causes an increase in the quantity demanded over a given period of time (Adil, Janeen.R. 2006),.
On the contrary, the quantity of the pencils demanded will be reduced drastically since the pencil will be totally replaced by the pens in the market. On the other hand, any fluctuation in the demand of pencils will depend on the manufacturers of the pencils. If they deem it proper that they maintain a fair cost of input and lower the cost of a pencil then they can still have their pencil demand retained. However, as expected, the pencil demand will be reduced while the demand of pens will increase sharply due to the reduced costs of producing a pen. Thus, a price war will be realized in between the manufacturers of pens and pencils. The dictator of the prices will be the pen producer since he has an advantage owing to the lowered cost of producing a pen.Get your
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The pencil manufacturer will consider price change as a response to the lowered prices of pens. Besides, it is not clear if the technological advance in the production led to the finding of cheap raw materials to produce pens or the technology involved a reduction in the cost of production without affecting the quality of a pen, that is, causing an improve in the quality of the pen. It there was no change in the quality of the pen produced, the great determinant to the quantity supplied and price will depend on the satisfaction derived by the customer in the consumption of either a pen or a pencil. In this case, we assume that the technological advances in the production of the pen not only led to the lowering of the cost of production of the pen but it also led to the improvement in quality of the pen. If this is the case, price effect will be that both will drop, but the pen producer has an upper hand to drop process lower than the manufacturer of pencils while still maintaining a profitable advantage to command and dictate the market, thus supplying more pens as opposed to the producer of pencils.
How managers for pen-makers and pencil-makers decide given the above answers?
The managers of the two manufacturing companies have opposite decisions in order to remain competitive in the market. In the given situation, the manager of the pens has had a breakthrough in the technology leading to the lowering of the prices of the pens. Mankiw, N Gregory, 2009. His market response will be to reduce the prices of the pens in order to sell more of them. This can be done with the view of the pencil manager. If the pencil manager responds by lowering also prices, the level to which the pen manager lowers his prices depends on the level to which the pencil manager counters. The pen manager can make sure that he keeps the prices fairly lower than those set by the pencil manager with a fact in mind he has a competitive advantage over the other.
On the other hand, the expected response that the pencil manager is more likely to do is to cut his prices in order to compete favorably. However, knowing that he doesn’t have a competitive edge over the pen manufacturer. The best decision the pencil manufacturer is likely to take is to wage an intensive marketing strategy in order to keep his pencil demand fairly higher. Combined with the slight reduction in the prices of pencils, he will consider not using price reduction as an entire strategy to keep his demand up but also marketing as a strategy. Besides, another strategy will be to copy the technology used by the pen manufacturers and introduce a pen production name under its brand in order to reduce the substitution effect of the pen as opposed to the pencil which is more likely to drive them out of business.
In the situation presented above, the technological breakthrough gives an upper hand to the manufacturer of pens. Besides, the manufacturer of pencils also has an opportunity to counter that if he can adopt price reducing strategy and adoption of pen production line to counter the effects of the pen manufacturer.
Adil, Janeen. Supply and demand. Minnesota: Capstone press. 2006.
Mankiw, N Gregory, 2009. Principles of micro-economics. Mason: Cengage learning. 2009.