Finance

Question 1

Part 1 The Short Term
Mrs. Acres Home-Made Pies has slowly become a very successful business operation and needs further expansion to meet the demand from the customers. Just recently the company invested in the expansion and was able to raise the supply somewhat however, the popularity of the pies has once again shifted the demand curve higher and now there is further need of meeting the demand.

In the short term, the application of any of the three options with Shelly will not have much effect on the current situation. Since the short term would not be able to correctly adjust to the changes, the demand of the product in hand will continue to rise. The only change in the conditions can be brought by the first option of raising the price while keeping the production levels the same. This would enable the demand curve to shift backwards and settle at equilibrium.

Part 2 The Long Term
The scenario presented in the long term will be completely different from the one in the short term. Since the result of all three options with Shelly can be seen in the long term, all three options are discussed separately.
The first option as mentioned in the short term will raise the price and lower the demand to equilibrium. However, after a while the demand for the product will start to decline at the high prices being charged by the company. This would result in the company taking action to increase the demand thus lowering price hence settling the demand-supply at the old equilibrium price.

The second option to increase the supply of the pies will move the supply curve in front to meet the demand. However, the supply will only increase with further investment which would have to be later paid back, thus a small increase in price would also be required to compensate for it.

The third option of contracting the production to a restaurant chain would enable the supply to increase in huge quantities. This would result in meeting the demand at a slightly higher price from before thus settling at a new equilibrium.

Part 3 The Equilibrium
The equilibrium in the short term and the long term will be both different. As mentioned above, in the short term only the first option can be utilized thus the changes would not have much time to settle in. This option is aimed at making the supply constant while increasing the price. However, the long term other options can be utilized which aim at increasing the supply to meet the demand. This major difference in the short term and long term will alter the demand, supply and the equilibrium price.

Question 2
Monopolistic competition is a type of market where many companies producing similar products exist in the market having non-priced based differences in their products. For a soft-drink company this could mean differences through different flavors of the drink including other differences.

Part 1 Factors of Production
The general factors of production defined for most operating business include
Land
Labor
Capital

For a soft-drink company, all of these factors will come into consideration. Land is an obvious factor that is required to put the soft-drink factory for production. This land can either be bought or be rented for a long duration. This piece of land can be at any location but near to the transport network so that once produced, the company can distribute the bottles easily throughout the city and country. The labor is required to operate the factory and induce efficiency in the production. Since production and bottling is a very technology intensive job, most of the labor is in the form of engineers and technicians who operate the machineries. The last factor of production is capital, without which a company cannot exist. Every company needs money to operate and a lot of capital is required for technology intensive companies like the soft-drink company. In case where a company needs to expand its operations to reap economies of scale a lot of capital has to be invested though owners equity and loans.

Part 2 Competitive Advantage
Each factor of production is important for the company and without them, the company cannot exist. Each factor on its own can give the company a competitive edge. The land factor is important for distribution and timely production. Thus if the land is closer to the city, the raw materials can reach quicker and the distribution can be done quickly thus efficiency can increase. The labor if well trained will also improve efficiency as there will be lesser wastages, errors etc. Also if the company has enough capital, they can invest in state of the art machinery that produces standardized products faster and more efficiently. Thus each factor can give the company competitive advantage.