Microeconomics Module – Supply and Demand

Ice-cream is one of the most popular food products in all parts of the world. In 2001 alone, the worldwide production of ice-cream reached an unprecedented 14.1 billion litres (Clarke, 2004). The United States remains an unchangeable leader of the ice cream market, with the annual consumption of approximately 22 litres per capita (Clarke, 2004). More than 90% of American households buy ice-cream and related products on a daily basis (Clarke, 2004). Two-thirds of ice-cream products are eaten outside home (Clarke, 2004).

It goes without saying that a multitude of factors affects the supply and demand of Baskin Robbins ice-cream. The main factors of demand include the number of buyers, income and tastes, price of complementary or substitute goods, as well as future expectations (Petroff, 2002).

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Any increase in consumer incomes will inevitably increase the demand for ice-cream. Changes in tastes can increase or reduce the demand for Baskin Robbins products. For example, consumers will buy more ice-cream from Baskin Robbins, if eating ice-cream becomes a matter of prestige.

Simultaneously, consumers may easily switch to other ‘entertainment’ foods like popcorn or candies, if their price decreases. Baskin Robbins must be particularly cautious about consumer expectations, as any changes in future prices may cause serious shifts in the demand for ice-cream. Consumers who expect that food prices will grow may choose to stay away from ‘non-critical’ food products like ice-cream. If other food products become cheaper, consumers may choose to spend more money on Baskin Robbins products.

The main determinants of supply include the number of sellers, production costs, new technologies, prices of complementary goods, and future expectations (Petroff, 2002). As the number of ice-cream manufacturers increases, Baskin Robbins will have to reduce the supply of ice-cream products and focus on selling and marketing the most competitive product varieties. Lower taxes and new technologies will increase the supply of Baskin Robbins ice-cream products to the market.

Price always affects the amount of goods and services which consumers are willing to purchase. Quantity demanded is “the number of units of a good that consumers are willing and can afford to buy over a specified period of time” (Baumol & Blinder, 2008, p.57). Price is the main predictor of the quantity of ice-cream demanded by consumers.

The growing price of ice-cream will reduce consumers’ willingness to purchase the product. The demand for ice-cream products is extremely elastic, and changes in price may disproportionately affect the quantity demanded. However, price is not the only factor of changes in the supply and demand of ice-cream.

The effects of minimum wages on the market and consumers are well-documented. In 1940, Hagen wrote that any increase in minimum wages would expand the economy’s propensity to consume through changes in income distribution and at the expense of businesses and entrepreneurs. Simply stated, when the government raises the minimum wage, it also increases consumer incomes and the economy’s purchasing power.

As a result, consumers will have more money to spend on ice-cream. Simultaneously, any increase in the minimum wage adds to the burden of production costs on firms. Baskin Robbins will have to spend more on wages and salaries for its employees. In this situation, the firm will either have to raise the price of ice-cream or reduce the amount of products supplied to the market. Whatever the choice, Baskin Robbins will have to change its business strategies, to maximize its profits under the new market conditions.

Conclusion

A multitude of factors affects the supply and demand of ice-cream. Price always predetermines the amount of good consumers are willing to purchase. Any increase in the minimum wage will increase consumer incomes and add to the burden of costs on firms. As a result, businesses will have to adjust their strategies, to maximize their profits under the new market conditions.

References

Baumol, W.J. & Blinder, A.S. (2008). Microeconomics: Principles and policy. Boston: Cengage Learning.

Clarke, C. (2004). The science of ice-cream. London: Royal Society of Chemistry.

Hagen, E.E. (1940). Elasticity of demand and a minimum wage. The American Economic Review, 30(3), 574-576.

Petroff, J. (2002). Chapter 1: Demand and supply. Microeconomics. Retrieved from
http://www.peoi.org/Courses/Coursesen/mic/fram1.html

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