Managerial Economics Study Set 10

Business

Quiz 3 :

Supply and Demand

Quiz 3 :

Supply and Demand

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List the key nonprice factors that influence demand and supply.
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Key non-price factors that influence demand and supply
Demand for a product is influenced by various factors other than price. Following is a list of key non-price factors that can influence the demand, and can shift the demand curve either left or right, although price remains same.
Consumer's Income : When consumer's disposable income rises, their ability to purchase goods and services also increases, which in turn increases the demand. Similarly, a fall in disposable income adversely affects the financial ability to purchase which causes the demand to fall.
Although the price of the product in question remains same, a change in income in terms of rise (fall), can cause the current demand to increase (decrease). In case of normal goods, demand rises when income rises.
With inferior goods, the demand falls as income rises. When income rises the demand curve for normal goods shifts to the right, while the demand curve for inferior goods shift to the left.
Consumer's Tastes and Preferences : Consumers purchasing decisions are hugely affected by their tastes and preferences. They may demand a certain product simply because they have a liking for it, or they may enjoy it more than other alternative.
The advertisers and sellers, to influence the consumer's tastes and preferences in favour of their product or service, use promotions, persuasive advertisings and use many other methods. Companies spend millions to make a brand and to make the customers feel strongly about their product.
Prices of Related Goods : A good or service could be either substitute and complementary to other goods. Substitute goods are in direct competition since they fulfil the same need. A change in the price of a substitute good would cause the demand of the other good under consideration to change in same direction.
For example, two television brands, Sony and Samsung are substitute goods. An increase in the price of Sony television would cause an increase in the demand for Samsung television. It will shift the demand curve for Samsung television towards right. It means more is demanded at same price.
On the other hand, complementary goods are used together. A fall in the price of one complementary good would inevitably lead to rise in the demand of both the related goods. For example, car and petrol are complementary goods. A hike in the petrol price, lower the demand for cars, and vice versa.
Future Expectations : Consumer's future expectations also affect demand. They tend to maintain high levels of consumption in current period, if they expect the price to rise in future. For example if large number of consumers expect a rise in the prices of onion, they would try to buy more today and keep a stock of it, therefore the current market demand of onions will go up.
Similarly, if consumer are expecting a fall in price in future or expecting a new edition of the product, they may decide to wait or postpone the purchase. If they decide to wait, they are decreasing the current demand of the good.
Expected shortage of a product in the future will also increase its current demand, to beat the shortage or just to gain from future transaction by buying at low price and selling at high price.
Number of Buyers : Demand is directly related to number of buyers. With more buyers there is more demand, and with fewer buyers, there is less demand. In addition to the number of buyers, the composition of the population in terms of age and sex, also influence the potential demand for the product. For example, if a company wishes to market children's toys abroad, the number of children in the particular target market, of that specific age would be an important influence on the potential demand of toys.
Fashion : If the product in consideration is currently more popular in the market, it will get more buyers, and the demand will eventually increase. On the contrary, if the product is out of fashion, its demand will automatically fall.
Non-price factors affecting supply:
Supply is the amount of the commodity; a producer is willing to put in the market, at a given price and at given point of time.
Following are the non-price factors that affect the supply and cause the supply curve to shift:
Costs and Technology : Production and selling involves cost, which includes labour costs, costs of raw materials, rent, interest payments, depreciation charges, and general and administrative expenses. As the firm's cost increases and as a result the production of the final good becomes more costly, the producer becomes less willing and able to supply more at the given price, and the supply curve shifts to the left.
On the contrary, low cost of production induces the producer to produce and supply more, which in turn shifts the supply curve to the left. It can be stated that, any action, which changes the cost of production, will change supply.
Technology entails applying scientific methods and innovations to production. Better technology in the form of automation, industrial robots, computer hardware and software utilization etc. allows for efficient use of factors of production, which, in turn, help in reducing unit cost of production.
When production cost decreases, supply increases, and when production cost increases, supply decreases.
Prices of other goods or services offered by the seller : It is quite common that a seller is supplying two or more substitute products. If a seller anticipates a fall in price in one of the substitute products, he or she will reallocate the resources to increase the supply of the other.
For example, a seller is selling LED and Plasma TVs. If the price of LED rises more than that of Plasma and it is more profitable to sell LED, than the seller will reallocate the resources to produce more of LED and less of Plasma TV. Therefore the supply curve of LED will shift towards right or its supply will rise, while the supply curve of Plasma will move inwards or its supply will fall.
Producer's future expectations : How much of a product the producers are willing and able to supply in the market also depends on their expectations about the rise or fall in the price of the product. Different producers may react differently to future price changes.
For example, if a manufacturer anticipates a price rise of his or her product, he or she may run the factory for extra shift or increase in more equipment to supply more to take advantage of higher future price. Therefore, the supply curve of the product shifts to the right.
Similarly, if a producer anticipates a lower future price, he or she would reduce the production and supply accordingly, which will shift the supply curve inwards.
Number of producers or sellers : Supply of a product is directly related to the number of producers or sellers. The more number the firms that produce a good, the greater is the supply of that good.
A successful product which is making profit always attract more and more producers or competitors, which initially increases the supply of the product in the market.
On the other hand, if a product is not doing well, few sellers may leave the industry, and the supply may accordingly go down in the market.
Government action : Government actions in the form of taxes and subsidies have their impact on production cost, which in turn affect market supply of the concerned product. Taxes like excise tax, increases the production cost and as a result, the production as well as the supply of the product are adversely affected.
On the contrary, subsidies encourage production and supply by reducing the cost of production. Subsidy is a government payment that partially covers the cost of an economic activity.
Weather Conditions : Weather has its own role to play in determining the level of supply of a particular product in the market. Agricultural commodities in particular are weather sensitive.
• A bad weather in the form of floods, droughts, unusual seasonal temperatures, etc adversely affects the cultivation of agricultural products, and as a result, supply gets affected.
• A good weather on the other hand increases the production as well as market supply of the product.

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Following are three sample equations. Plot them on a graph in which Q is on the vertical axis and P is on the horizontal axis. Then transform these equations so P is expressed in terms of Q and plot these transformed equations on a graph in which P is on the vertical axis and Q is on the horizontal axis. a. Q = 250 - 10 P b. Q = 1,300 - 140 P c. Q = 45 - 0.5 P
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Consider the following supply and demand curves for a certain product. Q S = 25,000 P Q D = 50,000 - 10,000 P a. Plot the demand and supply curves. b. What are the equilibrium price and equilibrium quantity for the industry Determine the answer both algebraically and graphically. (Round to the nearest cent.)
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"If Congress levies an additional tax on luxury items, the prices of these items will rise. However, this will cause demand to decrease, and as a result the prices will fall back down, perhaps even to their original levels." Do you agree with this statement Explain.
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Discuss the differences between the short run and the long run from the perspective of producers and from the perspective of consumers.
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Suppose a firm has the following demand equation: Q = 1,000 - 3,000 P + 10 A where Q = quantity demanded P = product price (in dollars) A = advertising expenditure (in dollars) Assume for the following questions that P = $3 and A = $2,000. a. Suppose the firm dropped the price to $2.50. Would this be beneficial Explain. Illustrate your answer with the use of a demand schedule and demand curve. b. Suppose the firm raised the price to $4.00 while increasing its advertising expenditure by $100. Would this be beneficial Explain. Illustrate your answer with the use of a demand schedule and a demand curve. ( Hint: First construct the schedule and the curve assuming A = $2,000. Then construct the new schedule and curve assuming A = $2,100.)
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Illustrate the example of the world sugar market with supply and demand diagrams. Be sure to show how the relative shifts in supply and demand have led to the reduction in the world price of sugar.
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In defining demand and supply, why do you think economists focus on price while holding constant other factors that might have an impact on the behavior of buyers and sellers
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The following relations describe the supply and demand for posters. Q D = 65,000 - 10,000 P Q S = -35,000 + 15,000 P where Q is the quantity and P is the price of a poster, in dollars. a. Complete the following table. img b. What is the equilibrium price
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A travel company has hired a management consulting company to analyze demand in twenty-six regional markets for one of its major products: a guided tour to a particular country. The consultant uses data to estimate the following equation (the estimation technique is discussed in detail in Chapter 5): Q = 1,500 - 4 P + 5 A + 10 I + 3 P X where Q = amount of the product demanded P = price of the product in dollars A = advertising expenditures in thousands of dollars I = income in thousands of dollars P X = price of some other travel products offered by a competing travel company a. Calculate the amount demanded for this product using the following data: P = $400 A = $20,000 I = $15,000 P X = $500 b. Suppose the competitor reduced the price of its travel product to $400 to match the price of this firm's product. How much would this firm have to increase its advertising in order to counteract the drop in its competitor's price Would it be worth it for them to do so Explain. c. What other variables might be important in helping estimate the demand for this travel product
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The ABC marketing consulting firm found that a particular brand of tablet PCs has the following demand curve for a certain region: Q = 10,000 - 200 P + 0.03 Pop + 0.6 I + 0.2 A where Q is the quantity per month, P is price ($), Pop is population, I is disposable income per household ( S ), and A is advertising expenditure ($). a. Determine the demand curve for the company in a market in which P = 300, Pop = 1,000,000, I = 30,000, and A = 15,000. b. Calculate the quantity demanded at prices of $200, $175, $150, and $125. c. Calculate the price necessary to sell 45,000 units.
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Why do you think it is important for managers to understand the mechanics of supply and demand both in the short run and in the long run Give examples of companies whose business was either helped or hurt by changes in supply or demand in the markets in which they were competing.
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Over the years, the market demand for "long-playing records made of polyvinyl has fallen considerably as new technologies replaced the old "LP." Yet, LPs are still available for sale and they sell at price points higher (in some cases much higher) than CDs. According to economic theory, when demand falls, the price of a product should fall. Explain this apparent contraction between theory and fact.
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Define the guiding or allocating function of price.
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Joy's Frozen Yogurt shops have enjoyed rapid growth in northeastern states in recent years. From the analysis of Joy's various outlets, it was found that the demand curve follows this pattern: Q = 200 - 300 P + 120 I + 65 T - 250 A c + 400 A j where Q = number of cups served per week P = average price paid for each cup I = per capita income in the given market (thousands) T = average outdoor temperature A c = competition's monthly advertising expenditures (thousands) A j = Joy's own monthly advertising expenditures (thousands) One of the outlets has the following conditions: P = 1.50, I = 10, T = 60, A c = 15, A j = 10. a. Estimate the number of cups served per week by this outlet. Also determine the outlet's demand curve. b. What would be the effect of a $5,000 increase in the competitor's advertising expenditure Illustrate the effect on the outlet's demand curve. c. What would Joy's advertising expenditure have to be to counteract this effect
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The following relations describe monthly demand and supply for a computer support service catering to small businesses. Q D = 3,000 - 10 P Q S = -1,000 + 10 P where Q is the number of businesses that need services and P is the monthly fee, in dollars. a. At what average monthly fee would demand equal zero b. At what average monthly fee would supply equal zero c. Plot the supply and demand curves. d. What is the equilibrium price/output level e. Suppose demand increases and leads to a new demand curve: Q D = 3,500 - 10 P What is the effect on supply What are the new equilibrium P and Q f. Suppose new suppliers enter the market due to the increase in demand so the new supply curve is Q = -500 + 10 P. What are the new equilibrium price and equilibrium quantity g. Show these changes on the graph.
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Define demand. Define supply. In your answers, explain the difference between demand and quantity demanded and between supply and quantity supplied.
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The following function describes the demand condition for a company that makes caps featuring names of college and professional teams in a variety of sports. Q = 2,000 - 100 P where Q is cap sales and P is price. a. How many caps could be sold at $12 each b. What should the price be in order for the company to sell 1,000 caps c. At what price would cap sales equal zero
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