The Case:
Barry's Furniture is a famous manufacturer and supplier of wooden furniture and is doing its business all over the country since 1979. The company is manufacturing both simple and antique furniture products for its clients. The company is also importing certain inputs from abroad for the production of antique furniture products. Simple furniture products are less costly and mostly used by middle income people and low income people while antique furniture products are only used by rich/high income people of our country. High income people have strong preference to buy antique furniture products at any given price. This company is maximizing its return by optimally utilizing available resources. Some resources like labor and capital/machinery are being shared in the production of both goods. As Pakistan economy has undergone through many changes in recent years like rise in electricity prices, higher tax on imports of input material used for antique wooden furniture products, this has affected this company also like other companies.
Requirement:
Using demand supply analysis and elasticity concepts which you have studied so far, discuss with logics how above mentioned changes will affect consumers of both simple and antique furniture products in the given scenario.
Solution :
I. DEMAND AND SUPPLY ANALYSIS
1. The law of demand states that consumers will purchase more of a good at lower prices and less of a good at higher prices.
2. The law of supply states that producers will sell less of a good at lower prices and more of a good at higher prices.
3. Equilibrium exits when there is no reason for a situation to change.
a. When equilibrium exits, the quantity people plan to buy is equal to the quantity that producers plan to sell.
b. The laws of demand and supply cause the market to move to equilibrium.
B. Other Demand Factors
1. Changes in demand factors other than price of the good will result in achange in demand.
a. An increase in demand is depicted as a rightward shift of the demand curve.
b. An increase in demand means that consumers plan to purchase more of the good at each possible price.
c. A decrease in demand is depicted as a leftward shift of the demand curve
d. A decrease in demand means that consumers plan to purchase less of the good at each possible price.
2. The price of related goods is one of the other factors affecting demand.
a. Related goods are classified as either substitutes or complements.
1. Substitutes are goods that satisfy a similar need or desire.
a. An increase in the price of a good will increase demand for its substitute, while a decrease in the price of a good will decrease demand for its substitute.
2. Complements are goods that are used jointly.
1. The law of demand states that consumers will purchase more of a good at lower prices and less of a good at higher prices.
2. The law of supply states that producers will sell less of a good at lower prices and more of a good at higher prices.
3. Equilibrium exits when there is no reason for a situation to change.
a. When equilibrium exits, the quantity people plan to buy is equal to the quantity that producers plan to sell.
b. The laws of demand and supply cause the market to move to equilibrium.
B. Other Demand Factors
1. Changes in demand factors other than price of the good will result in achange in demand.
a. An increase in demand is depicted as a rightward shift of the demand curve.
b. An increase in demand means that consumers plan to purchase more of the good at each possible price.
c. A decrease in demand is depicted as a leftward shift of the demand curve
d. A decrease in demand means that consumers plan to purchase less of the good at each possible price.
2. The price of related goods is one of the other factors affecting demand.
a. Related goods are classified as either substitutes or complements.
1. Substitutes are goods that satisfy a similar need or desire.
a. An increase in the price of a good will increase demand for its substitute, while a decrease in the price of a good will decrease demand for its substitute.
2. Complements are goods that are used jointly.
