Pie the Supply and Demand

¶ … Pie

The Supply and Demand of Homemade Pie

Mrs. Acres began making her homemade pies as a business venture and quickly found that she had hit on something quite profitable. At a price of four-and-a-half dollars, Mrs. Acres and her staff of three part-time employees were quickly selling two-thousand pies with a profit of one-and-a-half dollars, or thirty-three percent, per unit. Without adjusting the price, Mrs. Acres expanded operations to four full time employees with borrowed money, and soon her company was selling eight thousand pies every month. She is now faced with several options as to how to meet the ever-increasing demand for her pies, and her ultimate decision must be made through a careful consideration of the expected changes to price, supply, and demand in the short- and long-terms. These issues can be fairly complex, but a careful assessment of her current sales and projections can give Mrs. Acres a clear understanding of the most effective and profitable choice for her business.

There are several practical options for Mrs. Acres to consider as a next step to meet the growing demand for her pies. She could simply keep her operation at its current level, churning out eight thousand pies a month, and simply raise the prices until demand drops to meet her supply capabilities, increasing her profits but reaching an eventual ceiling relatively quickly. Alternatively, she could expand her operations still further -- almost certainly necessitating the securing of additional capital -- and maintain the current price until the demand is met, or she could simply contract out the production of the pies to a national restaurant chain, taking a back seat to company operations and a percentage of the profits.

The last two alternatives have far more long-term uncertainty than the first option. In the short-term, either the price will begin to increase incrementally and likely dramatically, or supply must increase with equal drama to meet the demand. Demand is unlikely to change in the short-term, but the actual level of demand for Mrs. Acres' pies is as yet undetermined -- her company quickly reached its supply threshold in two separate phases of the business, with no signs that demand was tapering off. Keeping the same production level will create a price increase with little effect on the demand in the short-term, and no effect at all on supply. Both of the second two options, increasing production facilities yet again or farming out production to a national restaurant chain, will create potentially large changes to the supply in a relatively short period of time, with little to no effect on price and, because of the lack if effect on price, no effect on the demand over the same period.

Each of these different options would have more complex influence on price, supply, and demand in the long-term. Keeping production at its current level, while leading to a short-term price increase, would eventually cut the demand for Mrs. Acres' pies; in a "perfect" world, the price would increase until the demand reached current supply levels (i.e. eight thousand pies per month). Increasing production without raising the price would eventually allow supply to meet demand, but the overhead costs will increase and profits-per-pie will be reduced, eventually leading to a price increase and a cut in demand at uncertain levels. Similar results would come from passing on production, though Mrs. Acres would be insulated from uncertainties.