Demand & Costs Flashcards
Defining economics
Economics is the study of how scarce resources are allocated to competing needs (Samuelson & Temin, 1976).
What resources at a company are finite?
- Money
- Human Capital
- Source Materials
- Time
All have an upper limit
What must a business manager decide?
How best to allocate resources to create the most value
What are the 3 economic fundamentals?
- Trade-off
- Individuals + firms act rationally
- Individuals + firms pursue their own self-interests
“Pursuit of self-interest”
People act and behave in ways that promote positive personal benefits
The Butcher example
What is demand?
- How much a consumer desires a product and how much they are willing to pay
Price of a product + how many a consumer is willing to buy at that price =
Demand
WTP
Willingness to pay
Defining Economics
Economics is the study of how scarce resources are allocated to competing needs (Samuelson & Temin, 1976).
What can influence WTP?
- The individual
- Time
- Prices of other goods
- Income
- Sometimes no logic. Personal choices.
Law of demand
Price goes down = demand goes up
Demand curves are specific to a particular ????? and ?????.
Place and Time
What affects the demand curve?
- Characteristics of a good changes
- Prices + characteristics of other goods
- Consumer income and wealth
- Firms adjust market strategy
Consumer Surplus
Consumer surplus is the value that consumers receive beyond what they pay for a product (Boulding, 1945)
What is price elasticity of demand (ED)?
Price elasticity of demand refers to the percentage change in quantity demanded when the price of a product changes by 1% (Moffatt, 2017).
Inelastic
Changes in price doesn’t have a major impact on the quantity demand
Elastic
Small changes in prices have a signification change in demand
Ed formula
ED = AQ/ Q over AP/ p
P - price
Q - quantity demanded
AQ - change in quantity
AP - change in price
ED < -1
Elastic
The quantity demanded changes by more than 1% for every 1% change in price.
Supply Curve - Slopes downward gradually; leans towards being horizontal
ED = -1
Unit Elastic
The quantity demanded changes proportionally with a change in price.
Supply Curve - Downward sloping demand curve close to a 45° angle
ED > -1
Inelastic
The quantity demanded changes by less than 1% for every 1% change in price.
Supply Curve - Slopes downward sharply; leans towards being vertical
ED = 0
Perfectly inelastic
The quantity demanded does not change with a change in price.
Supply Curve - Perfectly vertical
E = oo
Perfectly elastic
The quantity demanded is infinite at a particular price. Any change in price results in no demand for the product.
Supply Curve - Perfectly horizontal
How can managers estimate the shape of the demand curve of their business?
Past Data!
