Pies and Factors of Production

Homemade Pies & Factors of Production

Dr. Mary Robinson

BUS508: The Business Enterprise

Friday, April 23, 2010

Discuss what you think will happen to the supply, demand and price of the product in the short-term.

Shelly’s business is really taking off. After an initial run of 2,000 pies at a price of $4.50, Shelly sold all that was available. After a boost in workforce, Shelly’s second run of 8,000 pies sold out quickly. In this scenario, the supply increased, yet the demand increased as well. An increase in the demand would shift the demand curve to the right, which would increase the equilibrium price of the pies; however, supply has also increased which would shift the supply curve to the right, essentially cancelling out the increase in equilibrium price. In this situation, one has to look at the amount of increase/decrease to determine price. “If the increase in supply is greater than the increase in demand, the equilibrium price will fall. If the opposite holds true, the equilibrium price will rise” (McConnell-Brue, 2009, p56). Since both supply and demand increased, the equilibrium quantity will also increase. This would give Shelly a reason to expand operations and create more pies.

Discuss what you think will happen to supply, demand and price of the product in the long-term.

At some point in time, Shelly could increase the price of her pies, which would decrease the demand. The price point at which she would want to remain at would be dependent on profits. Shelly would want to settle on a price that will offer the best demand at the highest profits. Whereas, if she would charge a price higher or lower than the equilibrium price, profits would fall.

If Shelly keeps expanding her operations and continues to increase production of her pies, she will be faced with a situation where the supply for her product outnumbers the demand for her product. At this point, she will have to make a decision on how to proceed. Decreasing the...