[SIMULATION] Supply and Demand ECO 365

Supply and Demand Simulation

The rules of supply and demand are fundamental to market principles at all scales. On the microeconomic scale, supply and demand can dictate the interactions between individual buyers and sellers. At the macroeconomic level, these same principles are responsible for the behaviors observed at a national or regional level. The supply and demand simulation provided an example of the market conditions seen by an apartment management company in the city of Atlantis. The company is faced with a variety of microeconomic drivers that management must use to make decisions, which include consumer and quantity supplied. On the macroeconomic side, price ceilings and price elasticity have a significant impact on the company. These principles were chosen because they were shown to have a major impact on the apartment market in Atlantis.

Microeconomic factors deal with the dynamics that are unique to small markets, including households, companies, and organizations (Colander, 2010). The most prominent microeconomic factor in the simulation occurred with quantity supplied. When the amount of apartments supplied in Atlantis increased, the demand was decreased at an equal rate. Another microeconomic factor is consumer demand, which rose significantly after a new company settled in Atlantis and its employees needed housing.

Macroeconomic factors have a broad impact on region. In the simulation, price elasticity of demand was shown to have an impact on the local apartment market. Price elasticity describes the availability of alternatives to the product. When it comes to apartments, there are many other alternatives, such as homeownership and house rentals. Price ceilings are another macroeconomic factor covered in the simulation, which are government-imposed limits on the amount of money that can be charged by landlords in Atlantis. When a price ceiling is in affect, apartments cannot charge rent above the maximum level even if there are willing buyers.

Shifts in Supply and Demand Curves

Throughout the simulation there were many instances that created changes to both the supply curves and demand curves. When the demand curve shifted to the right, there would be an increased demand for apartment housing in the local market. The increased demand would lead to a shortage of available units and prices would need to rise to maintain equilibrium between supply and demand (Colander, 2010). However, it is also possible for the supply curve to shift to the right to maintain equilibrium. In this case, the prices will remain consistent while additional apartments are made available through new construction. It is also important to point out that the price simulation also showed how a shift to the left on the demand curve could cause prices to drop. As more people chose to purchase property in Atlantis, there was less demand for apartments and the company was forced to lower its rental prices.

Supply and demand curve shifts have many implications when it comes to the decision making of management. When the demand curve shifts to the right, the company chose to expand its inventory with new construction to accommodate the increased demand. By moving the supply curve to the left, the company was able to maximize profits and maintain equilibrium. However, the company was forced to lower prices when the demand curve shifted in the opposite direction. If the company failed to lower the apartment rental price, it would be left with excess supply and profitability would be negatively affected. It is essential for the company to monitor these economic forces and make decisions that will result in the greatest benefit for shareholders.

Applying these Concepts to the Workplace

The concepts that were covered in the supply and demand simulation can be applied directly to real world scenarios. The smart phone industry is highly competitive and there is a constant flow of new products entering the marketplace. Manufactures must keep a close eye on the economic trends at both the macroeconomic and microeconomic level. By monitoring economic conditions, these companies have the ability to design smart phone products that will cater to a specific niche within the market. When a new technology enters the marketplace, such as voice recognition, it has the ability to alter the consumer demand for a product. The new technology will motivate buyers to replace their current phone with an alternative that contains the latest technology. Smart phone companies can attempt to alter the demand for product at a microeconomic level by adding features that cater to a very specific demographic.

When a smart phone releases a product that has unique features, the price elasticity of demand becomes very narrow. This allows the company to charge a high premium on the product because there are very few alternatives for the consumer. As time goes by, other manufactures will release new products into the marketplace and price elasticity will start to increase. This has been a perpetual trend in the smart phone industry and will likely continue into the future. By applying these concepts to the workplace, companies can make effective decisions on marketing, technology development, and product pricing.

Equilibrium Price and Quantity

Changes to either supply or demand in the market will affect the equilibrium between price and quantity. When a microeconomic change occurs, such as the arrival of new residents to Atlantis, the price of apartments will rise if the quantity supplied is not increased. Equally, the price of apartments will decrease when new apartments are built to accommodate the new residents. When a price ceiling is implemented, the equilibrium of price and quantity can be artificially changed. In practice, price ceilings are common in large cities to ensure that rent is affordable to all residents. With all other factors remaining unchanged, a free market system will typically lean towards equilibrium between price and quantity.

Pricing Strategy

Price elasticity of demand is an extremely important topic for a firm’s pricing strategy. As seen in the simulation, there are many alternatives to the average apartment complex and consumers have different housing options to choose from. When there are many alternatives in the marketplace, companies are typically required to lower their prices to remain competitive. However, it is also effective to differentiate the product from the local competition. The apartment company in Atlantis could upgrade its building with more luxurious amenities, which differentiate it from the main competition. This strategy would allow the company to change higher rent because there would be fewer alternatives for renters who desire these services.  The main drawback to this strategy is that it would require a high initial investment in both time and money. Ultimately, the goal of an apartment company is to find a price point in the market that will create the highest profitability.

Summary

The supply and demand simulation showed how economic factors could affect a business on both small and large scales. The principles covered in the simulation can easily be extrapolated into the real world workplace as was shown in the smart phone industry. In order to maximize profitability, firms must make an effort to understand these economic factors to release products that will be successful in highly competitive markets. Overall, the simulation provided an insightful introduction into the dynamics of market economics.

 

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