Economic & Ethical Issues: Mrs Acre Homemade Pies

(1) Given the business situation of Mrs. Acres Homemade Pies (p. 30) and using the economic concepts of supply and demand, explain: Discuss what you think will happen to the supply, demand and price of the product in the short-term.

Given the growing demand and current supply schedule, Mrs. Acres Homemade Pies must make a critical business decision. The first alternative suggests increasing the price of the product while maintaining the production level. The immediate effect of the price shift will be a declined supply schedule that will increase equilibrium price. This will likely mitigate the current market shortage since the same produced quantity will be closer to the lowered equilibrium quantity and higher equilibrium price (Clark, 1995). The second option is to produce more units at the current price, which reduces the shortage of pies in the short-term. The supply schedule will increase over a constant demand schedule causing an overall lower equilibrium price. The main difference with this approach is that in order to increase production, an investment in resources is required making this option potentially less profitable in the short-term because of a higher marginal cost (La France, 1984). A third option would be to engage a national restaurant chain that would provide access to a much larger body of consumers. Through that expanded channel, demand will grow immediately, which would favorably increase the equilibrium price and business profits given the same supply schedule.

(2) Discuss what you think will happen to supply, demand and price in the long-term.

Various economic forces will play key roles in determining the long term effect on the supply, demand, and price, in this market. Determinants of supply such as resource prices and technology will have long-term implications. For example, once profits grow, the business will likely invest in advanced industrial technology that can automate procedures. This enhanced productivity will enable...