Supply and Demand Series - 4

Continuing form the point where we left in the earlier discussion on Demand and Supply, we will tweak with the scenario to create the following situation. We would again deal with the lemon vendor.

Let take the following situation: the last time the vendor visited the market, he had a lot people asking for lemons, so with that in mind he gets along with him a greater quantity of lemons than the previous time. As he set up the stall and set the board Rs 3 per lemon, and began waiting for customers to buy his lemons, he found that there was less number of customers turning up. He waited the whole day, and post lunch, he began giving a rebate, put up a board which read Rs 1.5/- per lemon. The number of consumer no increased!

Let’s have a look at what actually happened. The lemon vendor went took the earlier experience and got along with him a large but fixed quantity of lemons. He probably pitched the price point based on his earlier experience at Rs 3/- per lemon. But as the day progressed, not many lemons moved; we any way had to get at least some sales else he would need to take the stock back home. With this in mind he decides to reduce the price and see if the number of people who would purchase the lemons increases. This thought gets him to reduce the price and there by increase sale. Since the sale and the price were lower this time, the vendor would try to reduce the quantity he would get for selling also at that price.

This point is summarized by the variant of Demand and Supply rule as - If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and also quantity.

Read in Kannada: http://somanagement.blogspot.com/2011/03/blog-post_4535.html