Changes in Price

In this industry the customers are sensitive to changes in price and they will quickly change their allegiance should they find a lower price from one of our competitors. One of the requirements of the pump industry is to conform to an industry standard known as ISO 5199. One section of this standard in particular dictates a number of dimensional and hydraulic requirements that must be adhered to. This conformity across the market means that customers can replace an installed pump from any OEM with an equivalent pump without any requirement for on-site modification. As a result this gives customers freedom to shop around in the market and therefore competing products from each OEM are often viewed as substitutes. The product we supply would generally be perceived as being higher quality and classed as a normal good i.e. when customers incomes increase, demand for our product will increase.

This interchangeability between OEMs gives each company an elastic demand curve i.e. a small change in price will have a large change in demand. The company’s supply curve is also elastic because it is responsive to changes in price. We have the capacity to increase supply quickly due to holding a large inventory of the critical parts. This gives the company the ability to quickly benefit from price increases in the market or shortages in supply.

The company’s elastic supply and demand curves are illustrated in figure 1. At the equilibrium price of £5,000 the company is willing to supply 8,000 units. If the cost of inputs were to become cheaper or if technological developments brought about productivity gains the supply curve would shift to the right, Qs2. The equilibrium position would then be at a price of £4,000 per unit with output increasing to 12,000 units i.e. for small changes in price we will have large changes in supply.