INTRODUCTION
The demand and supply theories in economics are highly dependent on each other and also affect the price of the product/service. They also responsible for the determination of the price of the product and depends on the various internal and external factors but in order to fix the price of any product/service there should be equilibrium in demand and supply. I.e. The point at which the demand and supply curve intersect and that will be actual price of product. While working with Pinnacle Industrial Automation have learnt how to determine the price on constantly changing demand and supply condition as there are lots of factors taken under the consideration before deciding the price of the product or making the quotation. The main factor in determination of the price is profit margin of the organisation.
Market Demand: Market demand is the sum of all individual demand from the consumer in the relevant market. And demand curve defined as a curve which represents the relationship between the price of the good and the quantity of it which consumer will consume. (David H, 1987)
Elasticity of Demand: The elasticity of demand can be defined as measure of change in quantity demanded to change in the price of product when all the factors remains constant.
10
10
0
QUANTITY
D
PRICE
P2
P1
Q1
Q2
INELASTIC DEMAND
FIGURE 1
10
10
0
QUANTITY
PRICE
P1
D
P2
Q1
Q2
ELASTIC DEMAND
FIGURE 2
Elasticity
Price change
Change in Total Revenue
Elasticity Value (ε or η)
Inelastic
Price falls
Revenue decreases
<1
Large change in price(P1 and P2), small change in demand(Q1 and Q2)
Price rise
Revenue increases
Elastic
Price falls
Revenue increases
>1
Small change in price(P1 and P2), large change in demand(Q1 and Q2)
Price rise
Revenue decreases
Unielastic
Price falls
No change in Revenue
=1
Price rise
No change in Revenue
TABLE 1
The law of demand: It is the inverse relationship between the commodity price and the quantity in the market summed up in the market is called as low of demand. The price of the goods and quantity demanded depends on each other. From table we can see that some factor which affect the demand curve and will move right or left depends on the cause.
CAUSES
EFFECTS ON DEMAND CURVE
1
Increase in Income
Demand curve shifts right
The demand of inferior product falls and good product rises
2
Decrease in Income
Demand curve shifts left
The demand of inferior product rises and good product falls
3
Rise in price of substitute
Demand curve shifts right
Ex. Tea and Coffee. The price of tea rises the demand of coffee increases and demand of tea decreases
4
Fall in price of substitute
Demand curve shifts left
Ex. Tea and Coffee. The price of tea falls the demand of tea increases and demand of coffee decreases
5
Rise in price of complementary product
Demand curve shifts left
Ex. If price of cartages increases the demand of printer decreases
6
Fall in price of complementary product
Demand curve shifts right
Ex. If the price of the TV licence falls lots of people will start buying TV and hence demand increases
7
Change in taste
Change in demand curve
TABLE 2
There are some exceptions in which the demand curve will slope upwards (David H, 1987).
Giffen goods are inferior good and for which the quantity of demand increases as price increases, and demand falls as price falls. The main reason to increase is that the according to consumer as price increases the quality will improve, and hence they will substitutes the poor quality goods. (Philiph H., Jhon L., Bahadur K. 1999) and Veblen goods can be considered as exclusive goods which represent the wealth of the individual. As price of particular product reduce, the demand will decreases and vies-versa. (Barry H, 1991) and (David H, 1987)
The consumer surplus can be defined as it is the difference between the amount consumer prepared to pay and actual amount paid by the consumer for the same goods or service. (Richard L., Colin H. 1989). The main reasons for firm to drop the price are in order to maximise the market share and/or to attract the large number of customer but this will lead to reduce the revenue of the firm.
Market Supply: The market supply of the goods can be defined as the total quantity of the goods any firm whiling to sell in the market for period of time.
Elasticity of Supply: The elasticity of supply can be defined as measure of change in quantity supplied to the change in the price of the product with all other factors remains unchanged. (Philiph H., Jhon L., Bahadur K. 1999)
Q1
Q2
P1
P2
S
10
0
10
0
QUANTITY
PRICE
ELASTIC SUPPLY
FIGURE 3
Q2
Q1
P2
P1
S
10
0
10
0
QUANTITY
PRICE
INELASTIC SUPPLY
FIGURE 4
Elasticity
Price change
Change in Total revenue
Elasticity Value (ε or η)
Inelastic
Price falls
Decreases in Revenue
<1
large change in price (P1 and P2), small change in Supply (Q1 and Q2)
Price rise
Increases in Revenue
Elastic
Price falls
Increases in Revenue
>1
Small change in price(P1 and P2), large change in supply(q1 and Q2).
Price rise
Decreases in Revenue
Unielastic
Price falls
No change in Revenue
=1
Price rise
No change in Revenue
TABLE 3
The supply of goods depends on
CAUSES
EFFECT ON SUPPLY CURVE
1
Objective of the firm
Supply curve shifts right
Price of the product increases and hence profit maximisation
2
Production cost increases
Supply curve shifts left
Supply decreases and/or firm will increase the price of goods
3
Rise in the price of complements
Supply curve shifts left
The price of the goods increases and supply decreases
4
Taxation increases
Supply curve shifts left
The price of the goods increases hence supply decreases
5
Taxation decreases
Supply curve shifts right
The price of the goods decreases the supply increases
6
Improvement in technology
Supply curve shifts right
Production increase and the price of the goods decreases
7
Service cost
Supply curve shifts right
Service cost increases the price of the goods increases and in turn supply decreases
8
Foreign currency
Change in supply curve
The change in the price of foreign currency will also affect the supply of the goods as price changes
TABLE 4
Equilibrium market price: It can be defined as the price at which the producer is whiling to sell the quantity of goods and consumer whiling to buy the quantity of the goods. Here the quantity demanded is equal to quantity supplied at particular price and is unique. (Philiph H.,Jhon L.,Bahadur K. 1999) and (David H, 1987)
FALL IN DEMAND / DEMAND SHIFTS LEFT
S
10
10
0
QUANTITY
PRICE
D1
P1
P2
Q1
Q2
D2
RISE IN DEMAND / DEMAND SHIFTS RIGHT
0
10
10
QUANTITY
PRICE
D2
P2
P1
Q2
Q1
D1
s
FIGURE 5 FIGURE 6
At constant supply (S) when demand increases the consumer whiling to buy goods at given price but not able to obtain the goods as demand exceeds the supply. The demand curve will shift in the rightwards from D1 to D2 ¹. Hence in order to satisfy the demand the consumer will pay more and price increases from P1 to P2. Also to maximise the profit the supplier do not supply the goods to meet the demand and increases the price in order to increase the revenue. On other hand at when demand decreases the consumer wants to buy smaller amount of product at given price. The demand curve will shift in the leftward from D1 to D2 ¹. In order to maintain demand of product or to gain the profit the supplier will reduce the price of the goods. To achieve equilibrium the price of the goods falls from P1 to P1 as demand falls from Q1 to Q2.
¹ The factors which changes the demand will discussed in table 2
QUANTITY
S1
S2
Q1
Q2
P1
P2
10
10
0
PRICE
RISE IN SUPPLY / SUPPLY SHIFTS RIGHT
D
QUANTITY
S2
S1
Q2
Q1
P2
P1
10
10
0
PRICE
FALL IN SUPPLY / SUPPLY SHIFTS LEFT
D
FIGURE 7 FIGURE 8
At a constant demand (D) when supply increases, the supplier will find them self unable to sell the goods and hence to sell more they will reduce the price. The supply curve will shift rightwards from S1 to S2 ². When supply is excess the consumer will find some alternative to full fill their demand and try to find the goods gives maximum satisfaction, hence the price of the goods falls from P1 to P2 as consumer whiling to pay less. When supply decreases, this would manufacture supply smaller quantity of goods than the demand in the market. The supply curve will shift leftwards from S1 to S2 ². The consumer wants to buy goods or service at any price to satisfy their needs and hence the price of the goods increases from P1 to P2.
² The factors which changes the supply discussed in table 4
FIGURE 9
The price of the servo system depends on the demand from the consumer and machine manufacturer or end users and suppliers i.e. Panasonic from Japan. The demand and supply is interconnected and they are both depends on the price of the system. The price depends on the manufacturer i.e. first who decides the price and after that the distributor or service provider will add another factors, which affects the price of the product as explained in previous sections.
Manufacturer: There are the factors which affect the price of the product from supplier side. The price mainly depends on the quantity demanded from the consumer.
Production cost and Objective of Organisation: The main factor which decides the price of servo system. This includes labour cost, raw material cost, the cost of equipments and technology used. The cost of single factor changes the price of the servo system changes. During period of recession the supplier reduce the cost of manufacturing of PCB by 20% hence reduce the manufacturing cost. Price remains the same and revenue increases. This indicates the objective of organisation leads to profit maximisation ³.
Change in foreign currency: As the servo system is manufactured in Japan, so price of the servo system depends on the foreign currency. Last year 1$ = 44 INR the company places the order and committed to their customer as well but when they paid for the order after 3 months 1$ = 45.7 INR which reduces the margin of the organisation.
³ and â´ see the appendix
Service cost and Distributor's margin: The distributors have to decide their own margin after all the other factor which affect the price. Like transportation, servicing â´, warehouse rent etc. The margin varies depends on the demand of the customer³.
Location with Change in indirect taxation and subsidies: The tax will also contribute in deciding the price of the product. Some part of country has service vat, tax, Octroi, service tax etc. If consumer wants the product inside the Mumbai city he has to pay 4% Octroi and hence the price of the product increases. If customer receive goods outside the Mumbai city than the price will be low compared to Mumbai.
Price of complement products: The price of cables like motor cable, encoder cable and power supply cable depends on the price of copper. As price of the copper changes the price of cable changes and hence overall price of system changes.
The effect on price when demand changes
Quality of product: The quality of product is major factor. The consumer has to manufacture the machine and supplied it to other company hence they will look for best product at any price. In future this reduces the maintenance, results the good brand name.
Price of substitutes: In case of servo motor and drive the substitutes are induction motor and variable frequency drive (AC Drive). The price of servo system is £700 for basic model on other hand the price of equivalent AC motor and drive is £150. They will work nearly the same as servo motor but not accurate. Hence the customer who required only speed will not buy servo motor and drive.
Compatibility of product with other product: he servo motor and drive should be compatible to each other. Panasonics servo drive A4 series will only use with Panasonic servo drive A4 series. Also on order to operate the servo system using PLC, the user has to check the compatibility as pulse voltage of Panasonic servo drive is 24V DC and some PLC has pulse voltage of 12V DC (Telemechanique) . Hence for particular PLC user has to use the Panasonic servo system and have to pay the price as per market or demand. This will increase the demand of the system.
Demand from end user: If the end user will demand for particular brand then machine manufacturer or OEM's have to provide the same brand. Hence will increase the demand of the system and the price will get change depend on the demand. As demand increases the price will increases.
Service available: The consumer will see the availability of the service where they are sending their machines. Customer asked for the service available in Ethiopia or not and after that only they whiling to buy the product and we provided the service in Ethiopia. Which increase the demand of the product and hence the price and revenue.
CONCLUSION:
We can conclude that the price depends on the demand and supply of the product. There are various factors which affects the demand and supply. Also there is relationship between the demand and supply curve. The shape of demand curve also determines the movement of supply curve. The change in demand curve will tend to small price change and large quantity change or large price change and small quantity change. We can say that the price changes in steps i.e. from manufacturer will decides the price depends on the demand from the distributor and then the price again decided by distributors considering their margins and other factors are also measured for servo systems. But mainly price of the product depends on the company objective either increase the revenue or get maximum profit. In our organisation we used to increase the sales of the product.
Appendix
Octroi: It is the tax applied in Mumbai. It's a tax on the goods coming in to the Mumbai. The tax is 4% of the billing amount.
Servo system: The servo system consists of servo motor and servo derives, from same manufacturer and of same model will compatible with each other.
Motor cable: Motor cable is the cables used to connect the servo motor with servo derive. Each manufacturer has specific configuration for the motor cable.
Encoder cable: The encoder cable is the cable used to connect the encoder(placed inside the motor and gives specific pulses for rotations) to the servo drive and has specific configuration .
³ change in revenue
COST
SELLING PRICE/PRODUCT
NO. OF PRODUCT SOLD
TOTAL SALES
PROFIT/PRODUCT
£600
£700
1
£700
£100
£600
£690
2
£1380
£90
£600
£685
3
£2055
£85
£600
£678
4
£2712
£78
£600
£675
5
£3375
£75
£600
£670
6
£4020
£70
£600
£665
7
£4655
£65
TABLE 5
From the table we can see that as quantity of product increases the price decreases. As customer wants more discount. So revenue increases but clearly we can see that profit decreases. Is the main factor in the organisation that has improve the sales or revenue. There should be balance between them in order to fix/decides the price of the product.
â´ servicing
Servicing is also crucial factor in deciding the price. The price will increase for the customer who wants frequent service from the organisation.
