Economic Analysis: Supply and Demand to Understand Market Operations

This report delves into the fundamental economic concepts of supply and demand, crucial for understanding market operations and pricing strategies. It examines how supply and demand curves interact to determine market equilibrium, using the example of Polo Mint to illustrate these principles. The report explores factors that shift demand and supply curves, such as changes in consumer income, tastes, input prices, and government interventions. It analyzes how these shifts impact the price of Polo Mint, demonstrating the effects of increased or decreased demand and supply on equilibrium price and quantity. The analysis covers both short-run and long-run aggregate supply, highlighting their influence on pricing and market dynamics. The report concludes by emphasizing the importance of supply and demand analysis for businesses to make informed decisions about pricing and operational activities, ultimately affecting their profitability.

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Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
Supply and demand analysis to investigate and understand the operation of markets...............1
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Supply and demand are considered as two most important terms in economy, that helps in
understanding the operations of marketplace. Here, supply defines the amount of something
which is available in market. While, demand describes the amount of certain goods that people
want to complete their desires (Lloyd-Jones and Lewis, 2017). This would lead to develop a
market in which economical activities between sellers and buyers are done. Thus, behaviour of
buyers and sellers as a group, help in determining overall supply and demand for a particular
product at different prices.
This assignment is going to make a discussion on demand and supply analysis. This
would help in understanding the market operations and economical activities. In this regard, how
such analysis impacts on price of good, Polo mint is chosen which is first time manufactured in
UK, by Nestle Brand. This peppermint flavoured Polo is introduced in 1948, with a tag line
“mint with a hole” (Joyce and Paquin, 2016). In this report, primarily focus is given on factors
that leads to change in demand and supply, as well as how the same impact upon price.
TASK
Supply and demand analysis to investigate and understand the operation of markets
Supply and demand are the most important fundamental concepts of economics, which is
considered as backbone of economy also. Here, demand shows how much quantity of a
particular product or price is desired by a large group of buyers (Lloyd-Jones and Lewis, 2017).
It is also defined as amount of products that customers are willing to purchase on a certain price.
Therefore, relationship between quantity and price reflects the demand relationship. While,
supply of a commodity defines how much a particular market can offer the same (Supply &
Demand: How Markets Work, 2015). With this assistance, quantity which is supplied shows
amount of a specific good which producers are willing to supply for receiving a particular price.
This kind of correlation between price and quality of supply goods is known as supply
relationship. Henceforth, price is considered as a reflection of demand and supply, that underlie
the forces behind resources' allocation. In this regard, within theories of market economy, supply
and demand theory help in allocating resources in most effective and efficient manner (Kugler,
2018). In context with Polo Mint which is a brand of breath mint, changes in demand and supply
curve impact upon its price also. This affect can be better illustrated by understanding some basic
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terminologies of economy. It includes market equilibrium where shift in supply curve or market
demand will fluctuate the equilibrium price of Polo Mint.
The demand and supply curve mainly represents the market equilibrium, where
intersection of curves shows at which point, quantity of a particular product is supplied to
marketplace equals to quantity demanded by customers. In this regard, any changes in pricing
strategies leads to create difference between supplied and demanded quantities, either in a
surplus or shortage manner (Sodeyfi, 2016) . For an instance, setting up a price of product above
market equilibrium will lead to reduce quantity demanded as well as an increase in quantity
supplied. This lead to excess supply or supply quantity in a surplus and vice versa.
(Source: Economic Equilibrium. 2016)
Any shifts of market demand or supply curve will lead to make alteration in equilibrium
price also. Here, if market demand decreases then equilibrium price will also reduce (Sodeyfi,
2016). This price decrease lead to a movement along supply curve with a reduction in quantity
supplied. Therefore, by examining this market demand and supply, it should be kept in mind that
there are various factors present in economy that result in impact the outcome of marketplace
(Vivchar, 2016). Here, government intervention is considered as best example that results to
enactment of price ceilings or price floors. Similarly, there are certain variables for example,
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Illustration 1: Economic Equilibrium

price, income, taste, expectation of customers and more impact on demand of a product (Kugler,
2018). While, input price, technology, expectation of sellers and more, create changes in supply.
This figure has illustrated the changes in demand where an increase in demand shift curve
towards right and vice versa. Here, on demand side, customers' income plays a significant role in
shifting of curve (Joyce and Paquin, 2016). When income rises, consumers will buy more stock
of goods and even begin to buy more expensive goods. Therefore, this reflects that price of
related commodities like Polo Mint also alter demand. In this regard, shifting demand curve to
right will increase the demand of respective marketplace in particular market as well. Similarly,
demand of Polo Mint will also reduce if demand curve shifts towards left. Some more factors
that shift demand curve towards left or right can be better illustrated by following diagram.
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Illustration 2: Changes in demand

Here, it has identified that factors which increases demand curve of a particular product
like Polo Mint are- enrichment of taste, customers' willingness to buy on certain price, rise in
price of substitute goods, expectations that encourage buying and more, will shift demand curve
towards right (Kugler, 2018). All these factors lead to increase demand of commodities as well.
Therefore, in this regard, Nestle needs to concern more on quality and taste of Polo Mint for
getting high satisfaction of customers, that leads to increase its demand more in marketplace.
Similarly, other variables that lead to shift demand curve towards left, which decreases demand
are- taste shift to lesser popularity, people likely to buy substitutes, decrease in income level of
customers and more (Storey, 2016). This would impact upon price of Polo Mint and other
products as well in negative manner, which affect profitability ratio of business as well.
(Source: Aggregate supply. 2018)
Aggregate supply helps in measuring the volume of particular goods and services. As
illustrated in above figure, AS shows ability of an economy for delivering products to meet
demand of customers on time. Here, short run AS refers to total planned output where price may
change but prices of input factors like wage rates and technology may remain unchanged. While
long run AS reflects changes in both prices (Storey, 2016). In this regard, employment cost
(employment taxes, wages etc.) is affected by level of labour productivity. In addition to this,
exchange rate also affect prices of key imported products. Thus, both factors of short run
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Illustration 3: Aggregate supply

aggregate supply shift the position of supply curve and impacts on price of product like Polo
Mint also (Baker, Bloom and Davis, 2016). This would shift supply curve towards left as shown
in figure from AS1 to AS2. While within long run aggregate supply, changes in cost of raw
materials, production, labour and other inputs, will also affect price of a particular product. It
leads to shift supply curve from AS1 to AS3 as illustrated in above diagram. Similarly, some
other factors that lead to make changes in supply curve can be shown by below diagram:-
Here, it has illustrated that favourable natural conditions for production of a good, any
fall in input prices or raw materials, improved technologies and less government intervention are
major factors that lead to increase supply of commodities. This would lead to shift supply curve
towards right and there will be an excessive supply of goods as well (Saleem, 2017). In context
with Polo Mint, an increase in supply will impact on its pricing strategies and it may offer the
same on less price. It may increase demand of respective products also that helps in reducing
demand of substitutes. While, higher production cost, taxes, more regulations, rise in input cost
of materials and more, results in decreasing supply as well. This would lead to raise price of
products in economy market, which result in decreasing demand of same also.
Thus, through this description, it has identified that all such factors that impact on
demand and supply of Polo mint, also effects its pricing strategies (Baker, Bloom and Davis,
2016). Hereby, utility and demand of commodities may affect the price either in high or less
manner. Changes in production cost and other input factors directly impact on pricing and other
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operational activities of a company. Thus, changes in demand and supply will impact upon price
of Polo Mint, either negatively or positively. It can be demonstrated by below example:-
It has been interpreted from this figure that, when a market is in equilibrium condition
then price of a good or service like Polo Mint will tend to stay the same. As equilibrium state
shows the price at which quantity of a product demanded by customers is equal to quantity that is
supplied by sellers (Hitt, Xu and Carnes, 2016). However, any changes in demand or supply
procedures, leads to make alteration in equilibrium price and quantity also. This would can be
demonstrated by taking some examples of changes where any increase or decrease in demand
and supply, impact upon price.
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Illustration 4: Changes in equilibrium as per changes in demand and supply

Shift in demand curve
(when supply is unchanged)
To the left Reflects a decrease in demand Leads to decrease equilibrium
or price
To the right Reflects an increase in demand Leads to increase in
equilibrium
Shift in supply curve
(when demand is unchanged)
To the left shows a decrease in supply cause to decrease equilibrium
or price
To the right shows an increase in supply cause to increase in
equilibrium
This would have shown that an increase in demand of a product causes equilibrium price
to raise also. While, a decrease in same result to fall in price also. Other than this, in context with
changes in supply curve, it has examined that increase in supply leads to fall in price whereas
decrease in same turns to rise in equilibrium. For an instance, if household income increases then
demand of Polo Mint will also rise. It results to shift demand curve towards right and price of
product also hiked. On the other hand, if household income decreases then whole process goes in
opposite manner that is shift of demand curve changes and shift towards left (Hitt, Xu and
Carnes, 2016). It leads to decrease both demand and price of product that negatively impact on
profitability of this Nestle product. As per above mentioned figure, it has evaluated that price of
commodities like Polo Mint will remain unchanged if both supply and demand increases
simultaneously. Under this condition, equilibrium state will also not deflect if demand and
supply curve both changes in positive manner.
According to perception of Zervas, Proserpio and Byers (2017), it has examined that if
supplied quantity rises more rapidly as compared to demand then price of products will start to
decrease, because of excessive or surplus supply. But if demand hiked more rapidly and there is
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a limited supply, then under such condition- both demand and price of commodity will increase
more. Apart from this, if supply curve moves towards left that is decreased with increased in
demand then, in this situation quantity remain unchanged but price of product will hike more. It
gives opportunity to Nestle to sell its brand i.e. Polo Mint on high prices and gain high
profitability (Täuscher and Laudien, 2018). Furthermore, if increased demand of a product is
equal to increased supply then it states balance in equilibrium. Therefore, under this condition
both price and quantity will remain unchanged and company will offer its good on same price as
per demand. Thus, throughout the entire description it has analysed that any changes in demand
and supply curve whether increase or decrease, will impact upon price of Polo Mint and other
commodities accordingly. This would help in analysing different-different operational activities
a company will take to handle such market condition.
It has been demonstrated from whole description that to analyse market economical
condition, a person or a business needs to analyse the demand and supply curve first. For this
purpose, to ascertain how an event affect the equilibrium price as well as quantity of a product,
they should develop a framework of current demand and supply curve (Wang and et. al., 2016).
This would help in analysing whether an economic event affect demand or supply or not.
Through this condition, decision related to price strategy can also be taken accordingly.
CONCLUSION
It has been concluded from this assignment that supply and demand are the two major terms
in economy which define entire operations of market. By analysing both concepts, small
businesses and individuals can better access market conditions. This would help in making better
decisions related to price strategy, production and deliver commodities accordingly. As any
changes in demand and supply curve impact majorly upon price of products. Therefore,
analysing such economical concepts business persons can determine on which price they have to
offer products, so that retention of loyal customers can be gained. Through theories of both
economical concepts, individuals can determine actual condition of marketplace. It reflects that if
economy is good then income level of people also good. This would make them able to buy
certain products on specific price. It also leads to rise demand of such product as well that gives
opportunity to organisation to increase price of same, through which high profitability can be
gained. While, excessive or surplus hike of products lead to price of goods fall also that impact
on market economy negatively.
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