Question

You meet a friend of yours for lunch. He is a supplier of coffee machines. While talking business, you mention to him that you've decided to use the principles of supply and demand to determine the market price for the coffee you plan to sell at your kiosk on campus. He suggests that you're making a lot of work for yourself, and you should just set your price based on the prices charged by your competitors.

However, you're apprehensive about using that approach.
Which would be the best argument in favor of your decision to use the principles of supply and demand

Answer 1

Choosing supply and demand principles to set prices for coffee at a campus kiosk takes into account variances in market conditions, such as changes in consumer preferences and supply issues, ensuring that prices can adapt to reach equilibrium without relying solely on competitors' pricing.

Step-by-step explanation:

Using the principles of supply and demand to determine the market price for coffee you plan to sell at your kiosk on campus can be very beneficial. Competition indeed affects the market, but it doesn't always account for all the variances in the economy.

When you adhere to supply and demand principles, you can accurately adjust your prices based on real-time market conditions, like changes in consumer preferences or supply shortages. For instance, if the price of coffee were lowered to $2, according to the law of demand, the quantity demanded would increase, potentially creating a disequilibrium where demand exceeds supply, leading to a shortage. Conversely, when there's an excess supply due to a decrease in demand, prices would naturally fall to reach a new equilibrium.

Additionally, these adjustments of equilibrium price and quantity typically occur organically within a market-oriented economy, without much need for government intervention. An unforeseen event, such as a frost affecting the coffee crop in Brazil, might shift the supply curve of coffee to the left, causing a rise in price. Through the market's self-regulation, supply and demand will dictate the allocation and pricing, not just the singular aspect of competitor pricing. Hence, relying solely on competition and setting prices similar to your competitors may not optimally reflect the continuously changing market dynamics that supply and demand principles consider.

Answer 2

Answer and explanation:

There are several factors to be considered at the moment of setting the price of a good or service that is going to be offered. Raw materials, production costs per unit, and labor are the most common. However, setting the price based on the competitors seems vague. An organization cannot depend on this matter strictly of another organization since the reasons for getting to the competitors' price is unknown.

Basing the price of a product based on demand and supply could be a good option. It will imply the price level will fluctuate according to market requests. By doing this, companies make sure to keep their expected revenues almost the same regardless of what competitors might be doing.