Economics Essay on Demand and Supply

1934 Words Jan 21st, 2011 8 Pages
During this year’s exceptionally hot summer, ice cream manufacturers started using a new, cheaper method of ice cream production. Assume the market is initially in equilibrium. One has to reflect the following issues in this essay:
1. To show on a diagram the initial market equilibrium for ice cream.
2. To show the effect of a hot summer on ice cream demand.
3. To show the effect of the use of a cheaper ice cream manufacturing method on the ice cream supply.
4. To discuss the resulting changes in equilibrium price and the quantity trade.

In Economics, supply and demand are one of the fundamental concepts. Market price for any commodity is determined by the outcome of demand and supply. The literature explains that where the
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This means that there is no excess supply and it is just sufficient to meet the market demand.

The market for goods, which are not necessities, for instance ice cream considers to be elastic. This means that when the cost of production becomes cheap, the manufacturer can produce more than before at the same price and if more products are sold in market, there is potential for greater profit. An increase in sales is an increase in cash inflows as long as the sales price inflates the cost of production. If there were not enough demand in the market for the product, the supplier would spend money producing the good but lose money from lack of sales. Inversely, if there is a high demand for the product but the producer has limited supply, he can maximize his/her profit by asking customers to pay the maximum amount they can afford to spend on the product. These situations are examples of surplus and shortage.

Now as mentioned in the case that how hot summer can affect the demand of the commodity such as ice cream.

Effect of hot summer on ice cream demand
Demand has negative price elasticity so when price increases, demand decreases. In a market of ice cream or wine, these are not necessary commodities and consumers may choose to indulge in them, or they may not. Ice-cream sales are generally affected by the weather. A hot weather can promote ice-cream sales where as cold climate can decrease demand for
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