Reviewer-MANECO-Finals.pdf

MANAGERIAL ECONOMICS - FINALS THE LAW OF SUPPLY AND THE THEORY OF Shift to the left: Decrease in the overall PRODUCTION AND COSTS supply Shift along to the rig...

MANAGERIAL ECONOMICS - FINALS THE LAW OF SUPPLY AND THE THEORY OF Shift to the left: Decrease in the overall PRODUCTION AND COSTS supply Shift along to the right: Difference in Law of Supply quantity demanded/ quantity supplied The law of supply is the microeconomic law that states that, all other factors being equal, Malthusian Catastrophe as the price of a good or service increases, Food production is exceeded by population the quantity of goods or services that growth suppliers offer will increase, and vice versa. Did not happen because of technological Unlike demand, supply refers to the advancements (ex: mass production in willingness of a seller to sell the specified Industrial Revolution) amount of a product within a particular price and time. Shifts in the Supply Curve In plain terms, this law means that as the 1) Price - Refers to the main factor that price of an item goes up, suppliers will influences the supply of a product to a greater attempt to maximize their profits by extent. Unlike demand, there is a direct increasing the number of that item that they relationship between the price of a product sell. Meanwhile, if prices fall, suppliers are and its supply. disincentivized from producing as much. 2) Cost of Production - Implies that the supply Together with demand, the law of supply of a product would decrease with an increase forms half of the law of demand and supply. in the cost of production and vice versa. 3) Natural Conditions - Implies that climatic Alfred Marshall conditions directly affect the supply of certain Marshall may be the least recognized of the products. great economists as he did not champion any 4) Technology - A better and more advanced radical theories. However, he is credited with technology increases the production of a attempting to apply rigorous mathematics product, which results in an increase in the to economics to turn economics into more supply of the product. of a science than a philosophy. 5) Factor Prices and their Availability - The He published "Economics of Industry" back inputs, such as raw materials, manpower, in 1892, in which he popularised the use of equipment, and machines, required at the supply and demand functions and time of production are termed as factors. If equilibrium as tools of price determination. the factors are available in sufficient quantity Marshall was the first to develop the and at a lower price, then there would be an standard supply and demand graph increase in production. demonstrating several fundamentals 6) Transport Conditions - Refer to the fact that regarding supply and demand, including the better transport facilities increase the supply supply and demand curves, market of products. equilibrium, the relationship between 7) Prices of Related Goods - Refer to the fact quantity and price in regard to supply and that the prices of substitutes and demand, the law of marginal utility, the law complementary goods also affect the supply of diminishing returns, and the ideas of of a product. consumer and producer surpluses. 8) Government's Policies – Implies that the Economists now use this model in various different policies of the government, such as forms using different variables to fiscal policy and industrial policy, have a demonstrate several other economic greater impact on the supply of a product. principles. Market Saturation Supply Curve Market saturation is a situation that arises The chart depicts the law of supply using a when the volume of a product or service in supply curve, which is always upward a marketplace has been maximized. In sloping. A, B and C are points on the supply these kinds of "market is full" conditions, a curve. Each point on the curve reflects a supplier's growth can be achieved through direct correlation between quantity various product improvements, designing supplied (Q) and price (P). products to wear down with time, creating Shift to the right: Increase in the overall price differentiations such as low-cost or supply premium pricing, and being disruptive in a market to create demand. MANAGERIAL ECONOMICS - FINALS Some Legal Concepts in Equilibrium: The Equilibrium Government’s Price Control Consumers and producers react differently to 1) Price Floor price changes. Higher prices tend to reduce - Price floors prevent a price from falling demand while encouraging supply, and lower below a certain level. They are a legally prices increase demand while discouraging mandated minimum price. supply. Economic theory suggests that, in a - When a price floor is set above the free market, there will be a single price that equilibrium price, quantity supplied will brings demand and supply into balance, exceed quantity demanded, and excess called equilibrium price. The equilibrium supply or surpluses will result. price is also called the "Market Clearing 2) Price Ceiling Price" because, at this price, consumers - Price ceilings prevent a price from will buy the exact quantity producers take rising above a certain level. They are a to market, and there will be nothing legally mandated maximum price 'leftover.' This is efficient because there is - When a price celling is set below the neither excess supply and wasted output nor equilibrium price, quantity demanded will a shortage - the market clears efficiently. exceed quantity supplied, and excess demand or shortages will result. Equilibrium Price The equilibrium price is the price at which Supply Schedule the quantity demanded equals the quantity Supply Function: supplied. It is determined by the 𝑄𝑥 𝑠 (𝑃𝑥) = 𝑛𝑄𝑥 + 𝑛𝑃𝑥 intersection of the demand and supply If looking for Qs, substitute P and leave Qs as curves. zero. If looking for P, substitute Qs, transpose, and Surplus - If the price exceeds the equilibrium price. divide to find Px. Shortage - If the price is below the equilibrium price. Shifts in the Equilibrium An increase in demand, ceteris paribus, will cause the equilibrium price to rise; quantity supplied will increase. A decrease in demand, ceteris paribus, will cause the equilibrium price to fall; quantity supplied will decrease. Equilibrium Function: 𝑄𝑥 𝑑 = 𝑄𝑥 𝑠 Find P* first. Then Qxd * by subsituting P*. An increase in supply, ceteris paribus, will Then put their values to function: (Q*, P*) cause the equilibrium price to fall; quantity demanded will increase. A decrease in supply, ceteris paribus, will cause the equilibrium price to rise; quantity demanded will decrease. MANAGERIAL ECONOMICS - FINALS Circular Flow Model of Income in a Two-Sector Price Elasticity of Supply Economy 1) Elastic Supply (PES>1) - If supply is elastic, producers can increase output without a significant rise in cost or a time delay 2) Inelastic Supply (PES