During this year’s exceptionally hot summer, ice cream manufacturers started using a new, cheaper method of ice cream production. Assume the market is initially in equilibrium. One has to reflect the following issues in this essay: 1.
To show on a diagram the initial market equilibrium for ice cream. 2.
To show the effect of a hot summer on ice cream demand.
To show the effect of the use of a cheaper ice cream manufacturing method on the ice cream supply. 4.
To discuss the resulting changes in equilibrium price and the quantity trade.
In Economics, supply and demand are one of the fundamental concepts. Market price for any commodity is determined by the outcome of demand and supply. The literature explains that where the supply and demand are closely related to each other.
The demand is the amount or quantity of the product that the customer is willing to buy at a given price, assuming all other factors remains unchanged (ceteris paribus). The law of demand states that, if all other factors remains equal, higher the price of good, lower the demand of the product in the market and vice versa. There is an inverse relationship between the price and the quantity demanded for any particular good in the market. Generally, the quantity purchased by the buyers at a higher price is less because as the price goes up, the opportunity cost of the buying that product also increases. Therefore, consumers would avoid buying a product, which would force them to consume something else they value more.
The supply is the amount or quantity of the product that suppliers are willing to supply in the market at a given price. Law of supply states that, the supply of good increases when there is higher price for the same in the market as the manufacturers wants to maximize their profit. That shows that there is a reverse relationship between the price of the commodity and the quantity supplied.
These theories of demand and supply are often illustrated with a supply and demand graph, intersecting the supply curve with the demand curve, which is known as the market equilibrium point. It is quite essential for the market to reach this point in any circumstances for the smooth running of the global economy.
As mentioned in the case, during this year hot summer ice cream manufacturers have started using a new and cheaper method of ice cream production, which will essentially prove cost effective for them. The weather would also favor these manufacturers, as it is exceptionally hot this summer that will obviously increase the demand in the market, as cold treats are always enjoyable in hot weather. Now, because of the cheaper production method companies can produce more quantity at same price, which will eventually help them to maximize their profit.
Given the scenario of ice cream manufacturers in the case, the market is assumed to be in equilibrium in its initial stage.
Initial Market Equilibrium:
As mentioned earlier, the market equilibrium is a stage where the demand and supply curves intersect each other. This occurs at the price where the supply and demand of the commodity in the market balances each other. This creates a situation where producer keeps desirable price for their product in the market. If producer produces the amount above this equilibrium point and there is not equal demand in the market for the commodity then it will exert downward pressure on prices, as there would be surplus of goods in the market. Inversely, at a price lower than the equilibrium shortage would generate which ultimately would invoke customer to bid for higher prices. Now as per the given scenario, ice cream companies are shown at this initial equilibrium, which can be graphically represented as given below.
Initially in the ice-cream market before the exceptionally hot summer, the demand for the ice creams is denoted by the demand curve and the supply by the supply curve. The market forces of demand and...
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