Posted: May 25th, 2022

Analyzing Supply and Demand Homemade Pies

Business Case Study

Analyzing Supply and Demand in Mrs. Acres Homemade Pies

Looking at individual case studies helps develop a strong business sense. For example, by looking at the options Shelly Acres has concerning her pie making company can help explain larger notions about the theory of supply and demand, and how principles within that theory can help create strategic business decisions. As Shelly finds herself unable to meet demands of her product, she is faced with three options: expanding the facilities without raising prices, contracting production to an external source, or to maintain current production levels and raise prices. Out of all three, the smartest move is to raise prices until the supply equates demand.

Shelly Acres made a business out of selling her grandmother’s infamous home made pies. The original family recipe proved to be incredibly popular and profitable for Shelly Acres and her newly established company Mrs. Acres Homemade Pies.

“The company produces specialty pies and sells them in local supermarkets,” (Hirt & Ferrell 30). In the first thee months, Shelly sold 2,000 pies for $4.50 each. This brought the company a net profit of $1.50 per pie. However, demand quickly rose and she couldn’t keep up with the current production levels that comprised the supply. She then expanded operations by adding more employees and borrowing money to buy new equipment and now makes 8,000 pies per month and takes home $12,000 a month. Yet, Shelly’s business still continued to rise; “However, demand for Mrs. Acres Homemade Pies continues to accelerate beyond what Shelly can supply,” (Hirt & Ferrel 30).

There are several options Shelly can take to help equalize the supply and demand levels. The first is to expand the facilities without raising prices. Doing so would expand the production potential and increase the supply to meet the demand, without altering the price which has already been proven successful. This would keep the loyal customer base and provide a better capability for production, but also presents several problems. There is no guarantee that demand will continue to rise, so borrowing more money may prove to place the company at a disadvantage. Thus, this option may present future problems that could have easily been avoided by working through another strategy to level supply and demand. The second option would be to contract a third party to help increase production. For a percentage per pie, production can be dramatically increased and prices can stay level to what they have been before. However, this proves to have some faults as well. For instance, the price would naturally have to rise in order to cover the cost of the contracted production, but Shelly’s company would not be getting more money per pie despite any increases in the original prices of the pies. Any net profits acquired through a price increase would be forfeited to the third party contractor. The overall net profit of each pie would also go down. This means that the company would be working harder for less money, which is not a viable decision for working towards an expanded future.

The strongest option available to Shelly would be to temporarily increase prices and maintain current production levels. According to the rules of economics, “The law of supply and demand predicts that the price level will move toward the point that equalizes quantities supplied and demanded,” (Net NBA 1). Thus, the levels of supply and demand must reach an equilibrium point. By maintaining current levels and increasing prices temporarily, this will create an equal point for supply and demand of Shelly’s pies. As demand continues and supplies do not meet that demand, the price of the pies should be raised to help equalize the two within the short-term. This may loose some customers upfront, but it is both equaling supply and demand as well as providing the greatest levels of net profit which can then be re-invested in expanding production without borrowing more money. This will then lower demand to a number that the company can handle and allow them to plan for further expansion in the future. After such expansion the price should drop once again because they will be producing more of a supply. Thus, in long-term price models, the price per pie will once again be lowered because the company will be more capable of increasing supply.

This will once again increase demand levels, which will be able to be met by the future expanded production methods. All this is done without borrowing money or giving money away to an external source to increase production. With the pie’s already proven success, small price increases should not have a dramatic impact on demand, but just enough to allow the supply levels to catch up with consumer demand. Therefore to level the supply & demand points, prices must be dropped to once again increase demand.

References

Henderson, Hubert D. Supply and Demand. Kessinger Publishing. 2004.

Hirt, Geoffry & Ferrell, Linda. Business: A Changing World. 5th ed. McGraw Hill. 2005.

NetMBA. “Supply and Demand.” Internet Center for Management and Business Administration. 2007. Retrieved 28 Oct 2009 at http://www.netmba.com/econ/micro/supply-demand/

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