Maximizing Utility of a Market Constraint Can Be Overcome By Knowing When To Use It

A market constraint is a scenario where there’s a constriction in the distribution of a product or service. The difficulty sometimes is one of demand. The usual solution is to find substitutes or improvise production capacity elsewhere. However, sometimes even the best attempts at supply conversion aren’t effective. In such cases, what do you do?

What Are Two Common Constraints In Marketing Problem Solving?

The two most common constraints are time and money. This article will focus on money (price) as a market constraint and how to overcome it.

What then would be the alternatives open to a business owner who suspects that his company might be dependent on price increases for its revenue growth to make a substantial dent in the profit loss: he figures it will cost too much to buy additional capacity to cope with the extra demand. He, therefore, concludes that the best way out is to cut back on demand. And cut back, he does – but the effect on cash flow is usually so small that it is easily offset against whatever profit the business does make. So he figures that a market constraint induced by increased demand is a by-product of his decision to cut back on demand.

Case Study Of Market Constraint

This kind of market constraint can be avoided by asking the right questions and by ensuring that you have the right answers to them. For example, the owner of a wood processing plant would ask himself: 

  • Do you intend to buy a hydraulic wood splitter to reduce the quantity of wood you need to split on a daily basis? 
  • Can you, at the very least, reduce your demand by a marginal margin? 

His answer to these questions can go a long way to determining whether cutting back on demand is the optimal way to increase his profitability.The owner of a wood processing plant in upstate New York is a perfect candidate to ask these questions because the owner has to deal with customers who are always buying in bulk. And  knows how much wood to buy in bulk so that they can sell it for less than the owner makes in one day.

The owner figures it will cost an average of three dollars per cord to split wood with this machine. If he wants to sell these wood chips for only two dollars per cord, then he will sell a minimum of eight hundred cords of split wood to customers. In a tough market, when he has to compete with the other wood chip processors in the area, it is usually easy for him to beat the price his competitor is charging.

So, to overcome the problem of overcharging customers, a market constraint can be overcome by adjusting the price. How much less should he charge? How much more should he price the product at? How much more might he be able to price the product if he priced them at the price range that would allow him to make a profit even if he sold fewer cords of split wood? These are the type of questions he will need to answer in order to meet the objectives of his business.

Other Ways Price Can Be A Market Constraint

The same problems may be experienced when the owner of the firewood to-go package decides how much he will charge for the service he provides. If he figures it will cost an amount equal to the price of one cord of split wood, how much more might he be able to charge if he charged two cords of split wood for one cubic meter of wood? Setting the price will depend upon the price of the wood in the area where the owner of firewood goes to distribute his firewood. Setting the price too low will not attract any customers, but setting the price too high will drive away some customers. To get an idea of what the average price of wood is in his area, he should take note of the price of lumber in the local paper as this will give him an idea of what people in the area are willing to pay for wood.

Calculating the elasticity of demand will help a trader to determine the elasticity of supply in the case of the pricing of firewood. He should also consider the equilibrium of demand and supply. A trader may conclude that there exists a market constraint if the price of wood in his area is above his elasticity of demand. 

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