Economics: Concepts

Law of Supply and Demand

Supply and demand is a basic concept of economics. 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.

Elasticity of Demand in Economics

Elastic goods and services generally have lots of substitutes. As a result, if an elastic service/good’s price increases, the quantity demanded of that good decreases. Example of elastic goods and services include furniture, motor vehicles, instrument engineering products, professional services, and transportation services.

Different types of elasticity of demand:

Perfectly Elastic Demand (EP = ∞)
Perfectly Inelastic Demand (EP = 0)
Relatively Elastic Demand (EP> 1)
Relatively Inelastic Demand (Ep< 1 ) Unitary Elastic Demand ( Ep = 1) MBA case study / assignment question on this topic: “There is a high cross elasticity of demand between new and old cars”. Discuss the statement by explaining the features of cross elasticity of demand. Also compare and contrast cross elasticity with other types of elasticities of demand.

Academic Questions on Demand and Supply

Q. What does a demand curve show?

Q. What does a supply curve show?

Q. Produce a diagram: for the market for air travel that shows the effect of a news report on the dangers of travelling by sea.

Q How does Pepsi advertising affects the demand for: a) Pepsi b) Coca-Cola

Q. Explain how changes in consumer income affect the demand for Apple’s I-phone

Q. Use the table below to answer the following questions
What is the equilibrium price and quantity?
What would be the size of the shortage or surplus at a price of €180/tonne?
Assuming the demand for organic wheat rises by 180 tonnes per week at all prices, what would be the new equilibrium price and quantity?

Q. The beer industry is being revolutionized with the invention of new machinery which makes it cheaper and quicker to produce. Identify what would happen to equilibrium price and quantity in the market for beer.

Q. Analyse the specific factors that would affect the demand for McDonalds.

Q. Analyse the effects of the following on equilibrium demand and supply for cars, clearly identifying the shift in the curve:
a) A higher tax on gasoline
b) Increase in wages
c) Reduction in the cost of production
d) A tax on car parking
e) Increased provision of reliable cheap public transport
f) Government legislation for increase safety in cars, like side impact protection
g) Increase in the price of cars
h) Increased in the disposable income of consumers and Improvement in technology used in car manufacturing

Q. The demand for corn is linear and when the price of corn is $800, zero units of the good are demanded. When the price of corn is $0, then 800 units of corn are demanded. The supply of corn is linear and when the price of corn is $100, zero units of the good are supplied. When the price of corn is $1000, then 900 units of corn are supplied.
a) Given the above information, what is the equilibrium quantity and equilibrium price in this market?
b) Suppose a price ceiling of $500 per unit is imposed in this market by the government of Urbana. This will result in…
c) Suppose a price ceiling of $400 per unit is imposed in this market by the government of Urbana. This will result in…

Q. An example of a price control is a law that sets a minimum price that may be legally charged for an agricultural product, such as milk.
a) Is this farm price control a price ceiling or a price floor?
b) Draw a supply and demand diagram to illustrate the market price, equilibrium price, quantity supplied, quantity demanded, and the surplus or shortage when there is a binding farm price support.
c) What is the social objective of a farm price support? Is it effective?

Q. True-False Questions — If a statement is false, explain why.
a) The law of demand states that as price decreases, quantity demanded decreases. (T/F)
b) The market demand for a good is the sum of individual demands for the good. (T/F)
c) An increase in the number of suppliers in a market will cause the supply curve to shift to the left. (T/F)
d) An increase in the price of a good will cause the supply curve to shift to the right. (T/F)
e) An increase in supply causes an excess demand at the original price, and competition between sellers leads to a lower equilibrium price. (T/F)
f) An increase in demand causes an excess demand at the original price, and competition between demanders leads to a higher equilibrium price. (T/F)
g) The expectation that the price of a good will increase can cause the demand for that good to increase. (T/F)
h) If two goods are complements, then one can replace the other in consumption.. (T/F)
i) If income increases and the demand for a good increases, then it is a normal good. (T/F)
j) A change in demand refers to a movement along a demand curve due to a price change, but a change in quantity demanded refers to a shift in the entire demand curve. (T/F)

Q) Neha has just completed her MBA and joined a startup company. The company was planning to launch a new product in the market so the management wanted to understand the different factors that can impact the demand and supply of their products in the market. Help Neha to prepare a report on the factors impacting demand and supply of products in the market.

Q) Alpha Ltd market share was declining due to high competition in the market so it decided to enter a new segment. It wanted to determine the relationship between change in the quantity demanded of the product due to change in the price of the product in the market. Assume that at the price of ₹100, the demand for the product is 400 units. If the price of the product increases to ₹120, the demand decreases to 250 units. Calculate the price elasticity:

a) Using Arc elasticity method
b) Using Percentage method

Q)
a) What are the practical uses of the concept of price elasticity of demand for
different stakeholders in the production process?
b) Distinguish between the shift and movement in the demand curve.
Explain any five factors which would bring about a shift in the demand
curve for Maggie noodles.

Q. Explain the types of elasticity of demand. Calculate elasticity of demand for the following data.
Price of Apple (Rs.) Quantity demanded (KGs)
20, 100
21, 96

Q. Distinguish between the features of perfect competition and monopolistic competition. Give real world examples of each of these types of markets.

WTO and RTAs

World Trade Organization (WTO) is a global institution that helps create rules for global trade, with the help of its member nations.

Question: The most favoured nation principle has been the basis of the WTO agreements. Has trade non-discrimination proven to be a good design for multinational businesses.

Answer: Read here

Question: What trade risks does a multinational company face? Can these risks be fully mitigated? Explain your answer using examples and relevant theory.

Question: Critically evaluate the role the World Trade Organisation (WTO) plays in world trade and international business. Explain with examples to illustrate your answer, any three benefits of the WTO to businesses.

Q. Select any trade dispute between two countries from this webpage on the WTO site: https://www.wto.org/english/tratop_e/dispu_e/dispu_by_country_e.htm select the ‘dispute by complainant tab’.

Summarise the main arguments from each side and explain where the dispute is in the WTO complaint process.

What do you think the equitable outcome should be? Why? Present your answers.

Present your ideas in a world cafe organisation. Each group representative stays on table, everyone else goes to different table. You will be given time to go back to your groups and discuss what other teams discovered. Save your work to Microsoft teams.

Discussion:

• What patterns can you notice from the complainers?
• What patterns can you notice from the winners?
• Why do countries from the Global North tend to complain more than those from the South?

A regional trade agreement (RTA) is a treaty between the governments two or more countries; it lays down the rules of trade for all signatories. RTAs are defined as reciprocal trade agreements amongst two or more partners, including free trade agreements and custom unions.

Few Examples of regional trade agreements include the North American Free Trade Agreement (NAFTA), Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), the European Union (EU) and Asia-Pacific Economic Cooperation (APEC).

Regional trade agreements, in general, are of the following types: Custom Union, Free Trade Agreement, Common Market, Economic Union, Preferential Trade Agreement.

Here are some RTAs and their member countries.

North American Free Trade Area (NAFTA): US, Canada & Mexico

Andean Community: Bolivia, Chile, Ecuador, Colombia, Peru

Common Market of the South (MERCOSUR): Brazil, Argentina, Paraguay and Uruguay

European Union: 28 European countries in July 2013

South Asian Free Trade Area: India, Pakistan, Sri Lanka, Bangladesh, Nepal, Maldives & Bhutan

Economic Community of West African States (ECOWAS): 15 West African countries including Nigeria

Useful Link: RTAs on WTO.org

Microeconomics is the study of the economic behaviour of individuals decision-making units such as individual consumers, resources owners and business firm in the free enterprise system.

Microeconomics is a branch of economics that studies a smaller area of economics, including the implications of individual human action and firms on the utilization and allocation of scarce resources. Microeconomics shows conditions under which free markets lead to desirable allocations, and why different goods have different values. Microeconomics does not attempt to explain what should happen in a market, it only explains what to expect if certain conditions change.

The study of microeconomics involves several key concepts, including: Demand, supply and equilibrium; Production theory (converting inputs into outputs); Costs of production and Labour economics.

Management / MBA question on Microeconomics:

Q. Select 1 or 2 key theoretical concepts. with a strong microeconomic focus. from what has been discussed in class and provide a critical overview of its value in explaining or solving one or more real world microeconomic challenges (some general thematic suggestions include: “impact of smoking ban on pub closures in the UK’;”monopoly power and monopoly pricing amongst pharmaceutical companies’; ‘priclng policies amongst budget and other airlines’; etc,). Your work should be presented in essay format but may include tables. diagrams, etc, and may need a bibliography, dependirg on what you choose to work on. All bibliography entries need to conform to the Harvard referencing style.

Revenue Types

Revenue refers to the income earned by a firm through the sale of goods at different prices. In the words of Dooley, ‘the revenue of a firm is its sales, receipts or income’. The revenue concepts are concerned with Total Revenue, Average Revenue and Marginal Revenue.

Question. From the give table calculate Elasticity of Price, Total Revenue and Marginal Revenue. Also, explain the relationship between AR and MR.

Price, Quantity, Total Revenue, Marginal Revenue

Opportunity Cost

Opportunity cost is the value of the most valuable of all the options that one has to forego while choosing from a set of options.

In Managerial Economics, the opportunity cost is a useful concept as it helps in making decisions, especially when the manager has to make choice between different alternatives. Most business activities are carried on within constraint (‘scarcities’) which force choices and consequent sacrifices to be made.

In the corporate environment, managers often have to take decisions where they might have to forego the production of one commodity to fund the production of another commodity, or forego few projects to fund some other project.

And it applies in real life as well; almost every person and household applies the concept of opportunity cost in real life. Opportunity cost is the value of the most valuable of all the options that one has to forego while choosing from a set of options.

This is the basic concept of opportunity cost and it arises only because some essential input, money or capacity, is scarce and insufficient to take up all the options that are desirable.

Opportunity Costs are important when considering make-or-buy decisions, and also when deciding whether or not to sell something. Opportunity cost is also used to analyse capital projects. The discount rate used to find out net present values when evaluating capital projects is nothing but an opportunity cost of capital.

Here are a few more examples of opportunity cost that usually arise in business environment.

• The opportunity cost of using a machine is the most profitable alternative sacrificed by employing the machine in its present use.
• The opportunity cost of working for oneself (applies to most entrepreneurs) is the salary that one could earn in others occupations.
• The opportunity cost of funds used in one’s own business is the interest that could be earned on those funds by investing it elsewhere.
• The opportunity cost of buying a color TV for the reception area is the interest or profit that could be earned by investing the purchase money.

So opportunity cost requires the measurement of sacrifices, be it real or monetary. However, some decisions require no sacrifices to be made and is cost free.

In the above example, if the machine was lying idle, then the opportunity cost of using that machine for production is zero. If there were no constraint of money or capacity, there would be no need to sacrifice and hence no opportunity cost would arise. Also, opportunity cost is just a notional idea which does not appear in the books of account of the company.

This is the basic concept of opportunity cost; it arises only when some essential input such as money or capacity is scarce and insufficient which prevents us from taking up all the desirable options. If there were no constraint of money or capacity, there would be no need to sacrifice and hence no opportunity cost would arise.

Example

Every family has limited income and access to resources. Each member in the family may have a long list of shopping items that he or she may want to buy, but not everybody has the budget to buy all the things. That is where people are forced to make a choice; one has to forego few things in order to buy other things.

For example, a family may like to spend a Sunday by having breakfast at a restaurant, followed by a trip to a place like Kidzania, followed by lunch at Barbeque Nation, followed by a movie at the theatres. However, for a family of four, this itinerary could mean spending up to 10 thousand rupees in a day. So the family may be forced to reconsider the various options. Maybe they would now have breakfast at home and leave; they could replace Kidzania with a visit to the zoo or to the beach; they could replace Barbeque Nation with some other inexpensive restaurant.

Here’s another example. Say a carpenter gets work to make furniture in family A. After analysing the requirements and time required, he gives a quote of Rs. 25,000 for the work. Suppose, in the meantime, two other families B and C, reach to him to do their work. These two families are ready to give him work worth Rs. 15,000 and Rs. 20,000, respectively.

However, they all need the work to be done in the same week and the carpenter doesn’t have the bandwidth to accept multiple work. In that case, he would accept the work of Family A, the most profitable one, and let go of the other two. His opportunity cost in this case would be Rs. 20,000, the sacrifice of the next best option. Had he chosen either family B or C, his opportunity cost would have been Rs. 25,000 profit that he would have earned from family A.

We once went to a mall for shopping; when browsing through the various shops, we reached a computer store and a friend of mine said that she wanted to order a printer for home use. She was trying to decide between two printers, one of which cost Rs.25000 and had more features as compared to a second printer that cost Rs. 18000. After spending a lot of time thinking about what to choose, the salesman present at the store asked her whether he would rather have the printer with more features or opt for the cheaper printer and have Rs. 7000 worth of cartridges for the printer. Immediately, she selected the cheaper printer along with those extra cartridges.

In this case, the money that was not spent on the printer was made available for other purchases, in this case cartridges that would come in handy once the printer got into use at home. While paying for the printer at the checkout, we bumped into the owner of the store who happened to be someone whom I knew. I told him that he had a nice store. But he told me that while the place was good, the rent in the mall was too high. Offices located few blocks away from the mall were available for 30% less rentals, without much change in footfalls. He felt he could have spent that extra money in his business for buying more goods or for hiring extra staff.

That is when I realised that we often find ourselves in situations where we have to make choices. In some cases, the choice is between buying an item (say a purse) and not purchasing it. In other cases, the choice is between a more expensive option and a less expensive option.

It also occurred to me that people generally don’t usually think about opportunity costs when making choices, unless they are reminded of it by another person.

I personally observed that when I was shopping with my friends in the other stores in the mall; I saw was that my friends bought the cheaper option (or did not purchase at all) when they were reminded of the opportunity cost of making the purchase.

Demand Forecasting in Economics

Managers often resort to tools that will help them predict the future to some extent. Business forecasting is an essential component of corporate planning as it enables the organization to minimize risk and uncertainty. Demand forecasting is a specific type of business forecasting.

Demand forecasting helps organizations reduce risks involved in business activities and make important business decisions. It also provides an insight into the organization’s capital investment and expansion decisions.

Demand forecasting is not a speculative exercise into the unknown. It is essentially a reasonable judgement of future probabilities of the market events based on scientific background. Explain the statement by elaborating different qualitative and quantitative methods of demand forecasting. Which of the methods described by you is most suitable for forecasting the demand for “expensive mobile” and why?

Management (MBA) questions, study/assignments on Demand forecasting .

Q. Demand forecasting is not a speculative exercise into the unknown. It is essentially a reasonable judgement of future probabilities of the market events based on scientific background. Explain the statement by elaborating different qualitative and quantitative methods of demand forecasting.

Q. What is Demand forecasting? Explain different qualitative methods of demand forecasting. State which of the methods described is most suitable for forecasting the demand for “newspaper” and why?

Q. Kiara Enterprises is a very small organisation dealing with export rejected clothing. They are growing slowly but steadily. Kiara, the owner now wants to expand it a bit more and hence opts for Human Resource planning. It is advised to them to go for qualitative methods for demand forecasting as they have limited funds. Discuss all three qualitative methods of demand forecasting. Conclude by suggesting the best method suited for Kiara’s organisation.

‘Marginal Rate of Substitution’

The marginal rate of substitution (MRS) is the amount of a good that a consumer is willing to give up for another good, as long as the new good is equally satisfying. It’s used in indifference theory to analyze consumer behavior.

The marginal rate of substitution is calculated between two goods placed on an indifference curve, displaying a frontier of equal utility for each combination of “good A” and “good B.”

The marginal rate of substitution is the rate of exchange between some units of goods X and Y which are equally preferred. The marginal rate of substitution of X for Y – MRS(xy) is the amount of Y that will be given up for obtaining each additional unit of X.

Marginal rate of substitution MRS(x,y) = the marginal rate of substitution between both goods.

MRS(x,y) = dx/dy
dx = the change in good x, the number of units a consumer is willing to give up
dy = the change in good y, the number of units a consumer gains by giving up units of good x

MBA question on this topic.

Q) The manager of a company was analysing the trend of the products of its company (Commodity Y) getting replaced by another substitute product available in the market which gives the same level of satisfaction to the consumers. Calculate the rate of Marginal Rate of Substitution and analyse the result.

Combination, Units of Commodity Y, Units of Commodity X, Total Utility
a, 40, 10, U
b, 25, 14, U
c, 17, 19, U
d, 10, 27, U
e, 7, 38, U

Difference between Isoquants and Indifference Curves.

An isoquant is similar to an indifference curve in several ways. In it, two factors (capital and labour) replace two commodities of consumption. An isoquant shows equal level of product while an indifference curve shows equal level of satisfaction at all points.

However, there are certain differences between isoquants and indifference curves.

1. Firstly, an indifference curve represents satisfaction which cannot be measured in physical units. In the case of an isoquant the product can be measured in physical units.
2. Secondly, on an indifference map one can only say that a higher indifference curve gives more satisfaction than a lower one, but it cannot be said how much more or less satisfaction is being derived from one indifference curve as compared to the other, whereas one can easily tell by how much output is greater on a higher isoquant in comparison with a lower isoquant.

 

MBA case study / assignment question on this topic:

Explain how the consumer attains utility maximisation and producer ensures cost minimization with the help of indifference curve and isoquant technique.

The law of variable proportions states that as the quantity of one factor is increased, keeping the other factors fixed, the marginal product of that factor will eventually decline. This means that up to the use of a certain amount of variable factor, marginal product of the factor may increase and after a certain stage it starts diminishing. When the variable factor becomes relatively abundant, the marginal product may become negative. Law of Variable Proportions is also known as Law of Proportionality.

Management (MBA) questions, assignments on .

Q. Complete the hypothetical table below and explain in brief, the law of variable proportions.
Quantity, Total Product, Average Product, Marginal product
1, 10
2, 30
3, 48
4, 56
5, 56
6, 52