...CHAPTER 1 The Nature and Scope of Managerial Economics 33 APPENDIX TO CHAPTER 1: THE BASICS OF DEMAND, SUPPLY, AND EQUILIBRIUM In this appendix, we present an overview of the functioning of markets. We begin by reviewing the concepts of market demand and market supply curves and then show how the equilibrium price is determined at their intersection. Afterward, we examine the effect on the equilibrium price resulting from a change in demand and/or supply. This appendix may be skipped by students who remember all of this from their principles of economics course. The Demand Side of the Market Every market has a demand side and a supply side. The demand side can be represented by a market demand curve, which shows the amount of the commodity buyers would like to purchase at different prices. For example, the market demand curve for aluminum in Figure 1-3 shows that 4 million pounds of aluminum would be demanded annually at the price of $1.50 per pound (point A), 6 million pounds would be demanded at the price of $1.00 per pound (point E), and 8 million pounds would be demanded at the price of $0.50 per pound (point B). Note that more aluminum would be demanded annually at lower prices; that is, the demand curve for aluminum slopes downward to the right. This is true for practically all commodities and is referred to as the law of demand. Demand curves are drawn on the assumption that buyers' tastes, buyers' incomes, the number of consumers in the market, and the...
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...gratification and brand name goods. As consumers, “ we want what we want and we want it now”. Having been born in the United States Virgin Islands I can say that I have undoubtedly been spoiled by the instant gratification-brand name era. However I tend to forget that certain parts of the world has not caught up with the United States in terms of supply and demand. Per the website investopedia, supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. With that being said I have friends and family members who resides in the Tortola in the British Virgin Islands and do not share the luxury of the instant gratification-brand name era as I did/do in the United States Virgin Island. The Island of Tortola is reported to have a population of 23,383 per the Central Intelligent Agency (CIA) Fact book...
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...Pricing and output decisions in monopoly A monopolist is defined as a single supplier that constitutes the entire industry. For a firm to obtain a monopoly in an industry, basically, there must be barriers to entry that enable the firm to receive monopoly profits in the long run. We define barriers to entry as the difficulties facing potential new competitors in an industry. The following are examples of barriers to entry in the industry: 1. Lack of availability of inputs This may happen if one firm owns the entire supply of a raw material input that is essential to the production of a particular commodity. 2. Government regulations and exclusivity agreements In many industries, it is illegal to enter without a license provided by the government. For instance, it is necessary to obtain a license from the Independent Broadcasting Authority before you can manage an independent television service. 3. Patents A patent is issued to an inventor to protect him from having the invention copied for a period of years. At the end of the patent period, the patented invention is no longer private property but public property which anyone can copy or reproduce. 4. Brand image The brand image is taken to represent a high quality. Hence, it is often difficult or costly for entrants to attract consumers away from the well-known brand, especially as the dominant firm may employ price cuts to deter potential entrants to the industry. 5. Problem...
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...Demand Estimation Early in 1993, the Southeastern Transportation Authority (STA), a public agency responsible for serving the commuter rail transportation needs of a large Eastern city, was faced with rising operating deficits on its system. Also, because of a fiscal austerity program at both the federal and state levels, the hope of receiving additional subsidy support was slim. The board of directors of STA asked the system manager to explore alternatives to alleviate the financial plight of the system. The first suggestion made by the manager was to institute a major cutback in service. This cutback would result in no service after 7 p.m., no service on weekends, and a reduced schedule of service during the midday period Monday through Friday. The board of STA indicated that this alternative was not likely to be politically acceptable and could only be considered as a last resort. The board suggested that because it had been over five years since the last basic fare increase, a fare increase from the current level of $1 to a new level of $1.50 should be considered. Accordingly, the board ordered the manager to conduct a study of the likely impact of this proposed fare hike. The system manager has collected data on important variables thought to have a significant impact on the demand for rides on STA. These data have been collected over the past 24 years and include the following variables: a) Price per ride (in cents) – This variable is designated P in Table 1. Price...
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...Chapter 2 Demand What is Demand? If you demand something, then you 1. Want it 2. Can afford it, and 3. Have made a definite plan to buy it. The quantity demanded of a good or service is the amount that consumers lan to buy during a particular time period, and at a particular price. Law of Demand * Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded * The lower the price of a good, the larger is the quantity demanded. * The law of demand results from, * Substitution effect * Income effect - Substitution effect : When the relative price of a good or service rises, people seek substitution for it, so the quantity demanded of the good or service decreases. - Income effect : When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreses. Change in Demand When some influence on buying plans other than the price of the good changes, there is a change in demand for that good. When demand increases/deceases, the demand curve shifts rightward/leftward. Six main factors that change demand 1. The price of related goods consumed - A substitute is a good that can be used in place of another good. - A complement is a good that is used in conjunction with another good. Eg. The demand for energy bars increases when, The price of substitute for an energy bar rises...
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...Supply and Demand At the same times as a good number merchandise and requires hold to the essential financial standard of provide and require, in a lot of ways medical treatment does not. The standard of provide and require explains an equilibrium that increases among the contribute of an thing or examination and the require for it. The up-and-down is that of cost. There is a straightforward equilibrium in which as cost set increases; require decreases, and vice versa. Usually, make available reproduces stipulate as who would maintain to increase manufactured goods or provide a repair for which insist has dropped. The difficulty in medical treatment is that the customer frequently disburses small or not anything for services, regardless of the present realism of uninsured amount and copayments. As soon as this is the folder, value discontinues individual an issue in insist and demand enlarges to almost limitless points. There was a time when my health insurance cost me nothing, individual had no deductible and no copayment. So I had no out-of-pocket expenses whatsoever associated with healthcare. Now I really don't like going to the doctor, so it did not matter to me all that much, individual still did not use a great deal of care. But many people, when costs are not a factor, use services at the drop of a hat. This is the reality that triggered the current healthcare crisis. Even now, despite out-of-pocket costs, utilization is at record levels. People even tend to feel...
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...Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how of a product or buyers desire service. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much have a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. The Super Bowl for starters is according to thefreedictionary.com, an American football, the main championship game of the sport, held annually in January between the champions of the American Football Conference and the National Football Conference. Each...
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...DEMAND Two important forces of market are Demand & Supply Demand Can be defined as the desire for a good for whose fulfillment, a person has sufficient resources & willingness to buy the good. Desire – without money income, is a mere desire Potential demand - Desire with resources but without willingness to spend Effective demand - Desire accompanied by ability & willingness to pay Individual Demand – Quantity of a commodity that a person is willing buy at a given price over a specified period of time, say per day, per week, per month etc. Market Demand Total quantity that all the users of a commodity are prepared to buy at a given price over a specified period of time. Market demand is the sum of individual demand Law of Demand All other things remaining constant, the quantity demanded of a commodity increases when its price decreases & decreases when its price increases Other things - Consumer’s income - Price of related goods - Consumer’s taste & preferences - Advertisement Demand Curve Graphical representation of Law of demand. Demand curve concentrates on the price – quantity relationship Q = f(P) | | | | | | | | | | | | | | | | | | | | | | | ...
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...Economic Factors affecting the demand, Supply and Price of a commodity Introduction: Supply and demand are two important concepts in economics and supply and demand are considered to be the backbone of a nation’s economy. Demand is generally referred to as the quantity of product or services required by the consumers. The quantity of product or services referred to and the volume of product the consumers are ready to buy at a specific price. The demand relationship is generally referred to as the relationship between the price and quantity of products or services demanded nu the consumers. Supply generally represents the how much product or services a market can offer to the consumers. The product or services supplied refers to the amount...
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...DEMAND CURVES Shows how much buyers of the product want to buy at each price possible. Vertical axis: price Horizontal axis: annual demand Downward sloping: the higher the price, the less consumers want to buy. SUBSTITUTES: increase of price of one product makes consumers buy more of the other product (demand increases) COMPLEMENTS: increase of price of one product makes consumers buy less of the other (demand decreases) Change in price-> movement along the demand curve Change in other factors-> shift of the demand curve SUPPLY CURVES How much sellers of a product want to sell at every possible price. Vertical axis: price Horizontal axis: annual supply Upward sloping: the higher the price, the more sellers want to sell. MARKET EQUILIBRIUM EQUILIBRIUM PRICE: price at which the amounts supplied and demanded are the same. (intersection of supply and demand curve) CHANGES IN DEMAND OR SUPPLY (a) Increase in demand: demand curve shifts right-up, so the price and the amount bought and sold rise. (b) Decrease in demand: demand curve shifts left-down, so the price and the amount bought and sold fall. (c) Increase in supply: supply curve shifts right-down, so the price falls, but the amount bought and sold rises. (d) Decrease in supply: supply curve shifts left-up, so the price rises, but the amount bought and sold falls. ELASTICITY OF DEMAND AND SUPPLY Elasticity is used to avoid the problem of unit of measure. Elasticity: measures...
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...supply, demand, and equilibrium price are often mentioned. It is also common to see graphs which contain the supply and demand curve. We might ask, why are these terms so important when discussing economics? The answer is because these terms are the key components in the subject of economics. Therefore, before we can fully understand economics we must first understand the terms and how they are related. Demand can be described as the relationship between the price and quantity demanded for a particular good or service in specific circumstance. For each price provided, the demand relationship will tell the quantity that the customers are willing to purchase at a corresponding price. The quantity the customers are willing to purchase at a particular price is called the Quantity Demanded. An important thing to do is distinguish between demand and the quantity demanded. To explain the concept, the buyers are the people who want or need the product or service. The term “demand” refers to the willingness and ability of customers to purchase the good or service in the market. The demand relationship expresses the willingness and ability for the whole assortment of prices. To claim that a customer has a demand for a particular item is to declare that the customer has money with which to buy the item and is willing to exchange the money for the item. Customers do not demand what they do not truly want or need; therefore, a want or a need that lacks purchasing power is not a demand. With...
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...Market Demand The demand for a good or service is defined as quantities of a good or service that people are ready to buy at various prices within some given time period, other factors besides price held constant. And law of demand is the inverse relationship between price and the quantity demanded. It means the higher the price, the lower quantity demanded and vice-versa. A change of demand can be affected by two factors. First, the changes of price result in the changes in quantity demanded. In this term, change occurs only at the point in the curve. Curve line does not shift. Second, changes in the non-price determinants result in changes in demand. This led to curve shifts to the left or to the right. There are 5 factors of non-price determinants of demand. Here are: 1. Taste and preferences. There are many factors that trigger these factors include advertising, promotion, and even the government reports related to specific goods or services. 2. Income. Buying power is closely related to the demand of a product. Increased public income means demand also increases and vice versa. 3. Price of related products. -> Substitute or complementary products. 4. Future expectations. 5. Number of buyers. Market Supply Definition of supply is Quantities of a good or service that people are ready to sell at various prices within some given time period, other factors besides price held constant. The difference between demand and supply is the word sell for...
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...Demand Estimation ECO 550 28 July 2014 Demand Estimation Demand estimation is defined as the process of developing and estimating the amount of demand for a product or service. According Kehoe (1972) demand estimation consists of determining as accurately as possible, how many units of a product will be purchased at a specific price, and further determining the change in quantity demanded if the original price IS raised or lowered (p. 29). As a president or chief executive officer of a business, it is key imperative to have an understanding of what is expected in terms of sales. Successful sales companies use demand estimation to predict future sales typically in months, quarters, or years. With this concept, a company is able to estimate how much to produce. This paper will estimate the following demand equation for a leading brand of low-calorie, frozen microwavable food using data from 26 supermarkets around the country for the month of April, compute the elasticities for each independent variable, determine the implications for each of the computed elasticities for the business in terms of short-term, recommend whether or not the firm should cut its price to increase its market share, plot the demand curve for the business, and indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves. ------------------------------------------------- Q = Quantity demanded of a unit (dependent variable) ------------------------------------------------- ...
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...Supply and Demand Goodlife Management was the only firm in Atlantis that rented apartments. This gave Goodlife Management an advantage in the housing market. Detached rental homes owned by Oakridge Builders were the closest substitute to the apartment rentals. Without a substitute for rental housing in the Atlantis area, Goodlife Management maintained a monopoly in this market. Many factors cause changes to the supply and demand of a product or service. Companies need to make adjustments to pricing, supply, and demand to reach the equilibrium. Microeconomics With a vacancy rate of 28% Goodlife Management made the decision to lower the rental rates decreasing the vacancy rate down to 5%. The decision to lower the rental rates also enabled Goodlife Management to increase revenue. This product, two-bedroom apartments, demanded more quantity at a lower price and the supply quantity remained constant. This decision allowed the vacancy rate to decrease, revenue to increase, but still leaving a surplus of 100 apartments not rented. To rent the remaining apartments Goodlife Management would need to reduce the rental rate even more. Macroeconomics The increase in the population of Atlantis after new companies began developing businesses caused an increase in the demand for two-bedroom apartments. Lintech Inc, expanded its operations to Atlantis resulting in the population of Atlantis to increase. The demand has increased and the supply has stayed the same. The rental...
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...What is demand? Demand is comprised of three things. Desire Ability to pay Willingness to pay It is not enough to merely want or desire an item. One must show the ability to pay and then the willingness to pay. If all three conditions are not me then the demand is not real. This, by the way, is the purpose of advertising. While many may want a product it is quite another to be willing to pay. Advertising attempts to move a consumer from mere want to action. These day even condition two may not stand in the way of a consumer. With the advent of credit cards we are able to purchase products without the current ability to pay. Many stores and car dealers even offer on the spot credit though the interest rate may be quite high. What factors alter your desire, willingness and ability to pay for products? Some factors include consumer income, consumer tastes the prices of related products like substitutes for that product of items that may complement that product. Marginal utility - extra satisfaction a consumer gets by purchasing one more unit of a product. Diminishing Marginal Utility: The more units one buys the less eager one is to buy more. Think of diminishing marginal utility this way. It is a hot summer day and your sweating bullets. You come across a lemonade stand and gulp down a glass. It tasted great so you want another. This second glass is marginal utility. But now you reach for a third glass. Suddenly your stomach is bloated and your feeling sick. That's...
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