Demand, Supply & Market Equilibrium: PDF

Aircraft Engineering
Rolls-Royce

Table of Contents
INTRODUCTION...........................................................................................................................1
COMPANY BACKGROUND........................................................................................................1
MAIN BODY...................................................................................................................................3
1. Business and its main product..................................................................................................3
2. Demand and Market Equilibrium............................................................................................3
3. Price Elasticity of Demand......................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Demand refers to the term which indicate the desire of customers to consume the
products. It is very important term for the business as it is directly link to the sales and pricing
policy of the products which is being produce by the organization (Cooter and Ulen, 2016).
Present report will cover the business and its related products. It will tell about the
demand, market equilibrium and impact of factors of demand on the product. Report will also
demonstrate the price elasticity of demand, its impact on the product and indicate the elastic or
inelastic demand for the product.
COMPANY BACKGROUND
Rolls-Royce History
Rolls Royce Company is considered to be the most popular British multinational
company whose story was started in year 1884. In year 1894, Henry Royce (who was electrical
and mechanical business engineer) started manufacturing the electric cranes and dynamos. After
5 years later, in year 1899, that Company was registered as Royce Ltd. Henry Royce built his
first car in year 1904 whose name was Royce 10. That car was so impressive and powerful at
that particular point of time which made Charles Rolls impress from the creativity of the Royce.
In the same year 1904, in the month of May, Charles Rolls and Henry Royce met with each over
lunch at the Grand Central Hotel. By the December 1904, Rolls Limited signed an agreement
with Royce Limited to buy all the cars, which was made by Royce. These all car would sell
under the name of Rolls-Royce. After 2 years later, in year 1906, Both Henry Rolls and Charles
Royce decided to start the company. That is how Rolls Royce Limited was established which is
considered to be luxury car company in today's time. After the establishment of Rolls-Royce
Ltd., at the same year, the first car was launch under the name “Silver Ghost”, which announced
at the best car in the world. In year 1914, the company decided to make aero engines which lead
to development of Eagle Engine (Pugh, 2015). But this wasn't able to established and closed in
year 1931. After few years, Company launched Phantom 2 and at the end of 1930s, Company
introduced Phantom 3. Again during the starting of 1940s, Company started manufacturing aero
engines. In year 1946, Company launched Silver Wraith. In year 1949, Company introduced
Silver Dawn. After one year, Company introduced Phantom 4. Like this, Company innovated
Silver Cloud, Phantom 5 and Silver Shadow 1. During the 1970s, Company faced financial
problems, which lead company to reorganized in two different companies — Rolls-Royce PLC
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and Rolls-Royce Motors Limited. In 1998, Rolls-Royce Motors Limited Company began
suffering from loss. As the result, it is decided that company would be sold. Volkswagen
Company gained the control of the company. But due to some reasons, Volkswagen wasn't able
to make the cars under the name of Rolls-Royce which lead BMW to gain control of the
company. By the year 2003, BMW was able to name its cars Rolls-Royce. After a year later in
year 2004, Company re-introduced Phantom. For now, Rolls-Royce is operated by BMW AG
and headquartered in United Kingdom.
Company's Activities
Following are the key activities of Rolls-Royce Company which are as follows -
Engineering and Technology – Engineering refers to the division of science which basically
deals with the design, manufacturing, use of engines and machines. For the manufacturing of
luxury cars and aero engines, Rolls-Royce is required to focus on the investment in engineering
and technology. Along with that, Company's another key activity is research and development
which is considered to be the most important.
Operations – Operations refers to the part of administration of business which is basically deals
with the materials, equipment and human resources in order to improvement in the efficiency
within the business. Under this activity, Rolls-Royce is mainly focused on the supply chain
management, business process systems such as SAP & PLM and business process improvement
programme.
Services – Services refers to the type of activity which is intangible in nature. In the context of
Rolls-Royce Company, following services are being provided such as field service, data
management service, equipment leasing service, overhaul service and inventory management
service (Pugh, 2015).
Related Industry
Rolls-Royce Company is working under various industries such as Manufacturing
industry, automobile industry, Aerospace industry, Defence industry, Marine industry and
Energy industry.
Products
Products of the Rolls-Royce are as follows -
 Auto-mobile (Car)
 Power Generation Equipment
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 Marine Propulsion Systems
 Civil and Military Aero Engines
Main markets of Company
Main markets of the company is worldwide as it serves its products at the global market.
MAIN BODY
1. Business and its main product
The chosen business is Rolls-Royce Company. This company was founded by Charles
Rolls and Henry Royce in year 1904 as a partnership and in year 1906 as a business. Its
headquarters is in Derby, England, United Kingdom. Currently its key people are Claude
Johnson and Emest Hives (Pugh, 2015).
Chosen Product
The chosen product is “Civil and Military Aero Engines” which has been produce by the
company from its establishment.
Reason behind the chosen product
There are various reasons which lead me to choose car as the main product of the
company. These reasons are such as -
Personal Interest — I have personal interest in the Aero Engine industry as well as interest in
aircraft which has been produced by the company. Along with that, I have interest in economics
where demand and supply is my favourite topic.
Gain Knowledge — I wanted to gain knowledge about the reason behind the demand and supply
of the cars of the Rolls-Royce. It will help me to understand the importance of automobile
industry in the context of United Kingdom's Economy. It will also help me to demonstrate the
relationship between the factors and sales of the company which affects the business' demand.
This will also help me to understand the future and current trends of Aero industry which has
been continuously changing and is still changing. It will also make me understand the
relationship between price and demand deeply.
2. Demand and Market Equilibrium
Demand
Demand is considered to be an economic term which refers to the amount of products and
services, consumers want to buy at the given price (Newbery, 2018). It is considered to be a
driving force which lead company to produce or serve the products and services. Without
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demand, no company would be able to earn profits or bear the costs of production or gain
required resources for the running of organization. Demand includes consumers' willingness and
ability to purchase the offered products or services. There is always been inverse relationship
between demand and prices. If there is increase in the price of products, it will lead to decrease in
the demanded quantity of the products and vice versa. This is known as Law of Demand. But this
law of demand is not always work for every product. There are some exceptions such as Giffen
goods, essential goods, veblen goods and future price changes.
Market Equilibrium
Market equilibrium refers to the market situation in which demand of the products is
equal to the supply of the product (Barbier and et.al., 2019). It is one of the most important
concept. The price at which equilibrium is reach, that price is known as Equilibrium Price. The
quantity at which equilibrium is reach, that quantity is known as Equilibrium Quantity. In short,
Equilibrium means the state where demand of consumers and supply of producers are equal or
same.
From the above graph, it can be understood that Q is Equilibrium Quantity, P is
Equilibrium Price and that point where demand curve and supply curve are intersecting, is
known as Market Equilibrium.
Impacts of factors of demand on the main product
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(Illustration
1: Market Equilibrium
Source: Market Equilibrium in Economics:
Definition & Examples, 2019)

There are various factors which affects the demand. Due to change in demand, it also
affects the Civil and Military Aero Engines. These factors are as follows -
Price of Substitutes – Substitute products are those products which can be used in exchange for
the particular product (Salvatore, 2015). For example — In the context of Rolls-Royce
Company, Substitute of the Aero Engines (fuel engine) can be Electric Engines. Change in
substitutes' price will lead to change in the demand of particular products. Suppose, there is
increase in the price of Electric Engine, this would lead company to do more demand for Fuel
Engines. In case, if there is decrease in the price of Electric Engine, this result in as decrease in
the demand for the fuel engines.
Price of Complements — Complement products are those products which is being used with the
particular products together. In short, the consumption of particular product and complement
product are done together. In case of Aero engine, its complement product is Fuel. Change in the
price of complement products lead to change in the quantity demand for the particular products.
For instance — there is increasing in the price of fuel, it will lead to decrease in the demand of
aero engine. In the contrast, decrease in the price of fuel will result in increase in the demand of
aero engine.
Consumer Income — Another factor which influence the demand of the products and services is
consumer income. Along with that, it also depends upon the type of product, consumer is
consuming. In case — the consuming products are normal products, in that case, Increase in
income will lead to enhance the demand of the products. But if the product is inferior good, then
Increase in income will lead to decrease in the product's demand. In the case of Rolls-Royce
Company, Aero Engine is normal goods. Increase in the income (revenue) of commercial
customers will lead to increase in the demand of Company's Aero Engines. Decrease in the
income of customers will result in decrease in the demand of the Aero Engines produce by the
Firm.
Consumer Tastes and Preferences — Change in consumers' tastes and preferences will lead to
change in the demand of engines offered by the Rolls-Royce. For example — if there is trend in
electric engine, it would decrease the quantity demanded of Fuel Engine produce by the
company.
Consumers' Expectations of Future Price — Consumers' expectations regarding the price of
commodity for the future also affects the demand of the products. In case consumers expect that
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the price for the Aero Engine will increase. So at the present time, the demand for the product
will increase. On the flip side, expectations of consumers is that in the future, engines' price will
decrease, it will lead to decrease in the demand at present time.
Number of Buyers — Higher the number of buyers in the market for a particular product, higher
the demand of that particular product in the market (Farley and Voinov, 2016). Due to limited
Aerospace manufacturers, the demand for Aero Engines is also limited in the context of Rolls-
Royce.
3. Price Elasticity of Demand
Price Elasticity of Demand (PED)
PED refers to the extent to which change in the quantity demanded of the product affects
the change in the price of the product. It is kind of measurement which reflect the relationship
between price and quantity (Coglianese and et.al., 2017). It is measure in the term of %.
Formula of PED are as follows -
(% Change in Quantity)
(% Change in Price)
Impacts of factors of price elasticity of demand on the main product
Substitute Products — If there are more substitutes available in the market for the particular
product then the demand for the product is considered to be more elastic, because small change
in the price of substitute will lead to affect the demand of products negatively (Labandeira,
Labeaga and López-Otero, 2017). In case of Rolls-Royce, the substitute of the Aero Engines are
not available in the market which indicate that the demand for the engines is considered to be
inelastic.
Time — More than the time available to the company, the demand for the products of the
company is tended to be more elastic because that company have more time to find substitute of
that particular product. In case of Company Rolls-Royce, the demand of Aero Engine is inelastic,
because there will be no impact on the quantity demanded due to change in price, as there is no
substitute available.
Substitution Effects
Substitution effect is an economic term which refers to the situation where there is
change in the price of relative goods and this change lead to affect the quantity demanded of the
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product by the customers. Relative goods are either substitute goods or complement goods or
necessity goods or luxury goods (Kagel and Roth, 2016).
From the point of view of customers, the Aero Engine is necessity product as they need it
for the manufacturing of civil and military aircraft. The demand for engines will be inelastic
because whether there is any kind of change in the products prices, the quantity demand for the
product will remain same as it is required to produce the defence aircraft.
Income Effects
Income effect is a situation where if there is any change in the income of customers, it
would lead to change in the demand of products which is being consumed by the customers
(Leamer and Stern, 2017).
In case of Rolls-Royce's Aero Engines, the purchase of the product represent a large
portion of the customers' income. The demand for engines will be inelastic because if other
things remain same, increase in customers income will not affect the quantity demanded of
engines of the customers.
Pricing policy of the business
From the above analysis, it can be interpreted that company should increase their price as
it will help Rolls-Royce to gain revenue. Thus, the pricing policy should be Skimming.
CONCLUSION
From the above study, it has been summarized that for the creation of demand, Company
is required to produce the products or services in order to increase the sales, profitability and
business value. Demand is a significant concept which is being used by various businesses and
economists to measure the success of the company. Demand of any products is depended upon
the price of products as these both terms share inverse relationship. This relationship plays an
important role in the pricing policy for any company. Price elasticity of demand is one of the
major concept in demand which shows the relationship between price and quantity and to which
extent, this relationship can affect the customers and its buying behaviour.
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REFERENCES
Books and Journals
Barbier, E.B., and et.al., 2019. The economics of the tropical timber trade. Routledge.
Coglianese, J., and et.al., 2017. Anticipation, tax avoidance, and the price elasticity of gasoline
demand. Journal of Applied Econometrics. 32(1). pp.1-15.
Cooter, R. and Ulen, T., 2016. Law and economics. Addison-Wesley.
Farley, J. and Voinov, A., 2016. Economics, socio-ecological resilience and ecosystem
services. Journal of environmental management. 183. pp.389-398.
Kagel, J.H. and Roth, A.E. eds., 2016. The handbook of experimental economics. (Vol. 2).
Princeton university press.
Labandeira, X., Labeaga, J.M. and López-Otero, X., 2017. A meta-analysis on the price
elasticity of energy demand. Energy Policy. 102. pp.549-568.
Leamer, E.E. and Stern, R.M., 2017. Quantitative international economics. Routledge.
Newbery, D., 2018. Shifting demand and supply over time and space to manage intermittent
generation: The economics of electrical storage. Energy Policy. 113. pp.711-720.
Pugh, P., 2015. The Magic of a Name: The Rolls-Royce Story, Part 1: The First Forty Years.
Icon Books Ltd.
Pugh, P., 2015. The Magic of a Name: The Rolls-Royce Story, Part 2: The Power Behind the
Jets. Icon Books Ltd.
Salvatore, D., 2015. Managerial economics in a global economy. OUP Catalogue.
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