Demand and supply curves in the market of festive goods

It portraits the market of festive goods. The demand for festive goods is presented as DD. SS curve represents the supply curve for festive goods. Demand and supply balances at point E. Price is P₀ and quantity is Q_0. During festive seasons, people increases demand for festive goods because of their increasing preferences for these type of goods. When people’s demand changes for factors other than price then this cause a change in demand reflected by a shift of the demand curve (Maurice & Thomas, 2015). When demand increases then demand curve shifts rightward. During a decrease in demand, the demand curve shifts inward. In the festive season, because of increasing preference the demand curve shifts rightward. After change in demand, the new demand curve is D₁D_1.  With the new demand curve and existing supply curve, the usual demand-supply equilibrium is attained at E_1.  Corresponding to E_1, price increases to P₁ and quantity in the market increases to Q₁. Therefore, under general circumstance the increased demand pushes prices upward. The decision of retailers to offer discount that is offering the good at a lower price thus contradicts the usual demand supply norms (Nicholson & Snyder, 2014). This in turn creates a puzzle between standard economic theory and business strategy of retailers during festive seasons.

For a perfectly competitive market structure, because of presence of numerous buyers and sellers no single buyers or sellers can influence the price. Firms in this kind of market have to supply products at the given price. The fixed price in the market makes the demand curve perfectly elastic. Therefore, the demand curve faced by the perfectly competitive retailer is horizontal straight line (Cowen & Tabarrok, 2015). The horizontal demand curve is a distinct feature of perfectly competitive market.  The marginal revenue curve is same as the demand curve. The upward rising portion of marginal cost curve represents the supply curve of the competitive market. Price and quantity in the market is determined from equalization of demand or marginal revenue and supply or marginal cost curve. D shows the demand curve of the competitive retailer and S is the supply curve. Initially, E is the point of equilibrium. The price associated with equilibrium point is P₀. In the festive season people increases demand for festive goods. The competitive retailer now face a higher demand. With an increase in demand, the demand curve will shift upward to D_1.  As competitive retailers do not have control over price, price moves in line with demand (Rader, 2014). With increase in demand, price in the competitive market increases as well. In the festive season thus when demand increases, the price should also increases. This shows why increase in demand in festive season should not lead to discounting.

Pricing strategies in perfectly competitive market

Under imperfect competition, the demand curve is downward sloping and is shown by the average revenue curve. The initial demand curve is shown as AR₁. The marginal revenue curve is shown as MR_1. The imperfectly competitive firm takes equilibrium decision at the point where marginal cost passes through the marginal revenue curve. E indicates the equilibrium point. Corresponding price and quantity are P₁ and Q₁ respectively. Elasticity is a measure of relative responsiveness of demand. Higher the elasticity greater is the demand curve (Friedman, 2017). In an imperfectly competitive market, sellers using their market power decides over price and output. The seller can sell a high output at low price or low output at a very high price. The increase in elasticity is shown from a relatively flatter AR curve AR_2. Following the relation between marginal revenue, average revenue and elasticity with the flatter AR curve the MR curve will be flatter as well. The new marginal revenue curve MR₂. With changing demand and marginal revenue a new equilibrium point E₁ determining price and quantity in the market. The new equilibrium shows a lower price P₂ and higher quantity Q_2. This implies as the demand becomes more elastic, retailers take advantage of higher elasticity and reduces price to increase their sales volume (Bernanke, Antonovics & Frank, 2015). This explains the rationale of sellers to offer a discounted price during festive season. With standard demand supply condition and in the competitive market it is seen that high demand should increase the price. This is only the imperfectly competitive market that shows how change in demand and elasticity influences retailer to lower price or giving discount.

During festivals, everybody celebrates their festive spirits in a single platform. People willing to celebrate the festive days happily. For their most awaited festivals, people make demand for additional goods like decorating materials, sweets and increases demand for their usual goods. They even ready to spend a greater share of their income to fulfill their demand in festive seasons. Due to increase in preferences, demand for these goods increases. As people demand various goods during this time they look for some offers or discount to save money (McKenzie & Lee, 2016). If any retailer offers a slightly low price, then many people switch their demand to that shop. In an imperfectly competitive market, sellers can influence price. In order to undercut competitors’ share they reduce price of goods offered in their stores.

Price and demand in imperfectly competitive market

In Singapore, the demand for live Christmas tree increases rapidly. People prefer to use live Christmas tree for decorating houses during Christmas. The specialty of live Christmas tree is that it has a sweet scent as compared to normal plastic tree. People have a greater preference for real things than non-real things. This pushes the demand for live Christmas tree up. The retailer sellers such as JM flower, Prince Landscape, Far East Flora, IKEA and Fun’s Florist & Nursery all face an increase in demand for their product (channelnewsasia.com, 2018). Demand gets a pick in early December. After Christmas, the trees are return to the nursery. IKEA offers a 50 percent discount on prices of trees to increase sales volume.

In competitive market, free entry and exist of the firms erodes any short run profit or loss such that only normal profit left in the market. In the presence of short run profit, new firms join the industry causing an increase in supply. As a result, price decreases. Entry continues until price equals to minimum point of long run average cost. In times of loss, firms close down operation reducing the supply and hence price increases. Ultimately, price is settled at the minimum of average cost. At this point, firms can only attain a normal profit (Fine, 2016). However, the characteristics of imperfect competition is different from that of competitive market. The market structure of festive goods is assumed imperfectly competitive. The assumption of normal profit is not hold for imperfect competition. Under imperfect competition firm does not utilize their capacity fully.  That is in most of times they do not operate at the minimum of average cost. Monopolistically competitive market is a possible form of market for seasonal or festive goods. In monopolistically competitive market, long run equilibrium is determined where demand curve is tangent to long run average cost curve. In the market for seasonal of festive goods firms try to make as much profit as profitable (Baumol & Blinder, 2015). They offer price or quantity discount to increase sales volume.  Therefore, the long-term equilibrium analyses of competitive market is not much relevant for seasonal/festive products. 

References 

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of microeconomics. McGraw-Hill Higher Education.

Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave Macmillan.

Fine, B. (2016). Microeconomics. University of Chicago Press Economics Books.

Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University Press.

Live Christmas trees gaining popularity in Singapore. (2018). Channel NewsAsia. Retrieved 14 February 2018, from https://www.channelnewsasia.com/news/singapore/live-christmas-trees-gaining-popularity-in-singapore-8242414

Maurice, S. C., & Thomas, C. (2015). Managerial Economics. McGraw-Hill Higher Education.

McKenzie, R. B., & Lee, D. R. (2016). Microeconomics for MBAs. Cambridge University Press.

Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application. Cengage Learning.

Rader, T. (2014). Theory of microeconomics. Academic Press.