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A casestudy on price, demand and supply

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Introduction

Explain what is meant by business economics and how the price effects changes in demand and supply. What is business economics: - Clearly we will be studying firms: the environment in which they operate, the decisions they make and the effects of these decisions - on themselves, on their customers, on their employees, on their business rivals and on the public at large. But what particular aspects of business does the economist study? Firsts are essentially concerned with using inputs to make outputs. Inputs cost money and output earns money. The difference between the revenue earned and the costs incurred constitutes the firms profit. Firms will normally want to make as much profit as possible, or at the very least to avoid a decline in profits. In order to meet these and other objectives, managers will need to make choices: choices of what types of output to produce, how much to produce and at what price, choices of what techniques of production to use, how many workers to employee and of what type, what suppliers to use for raw materials, equipment etc. ...read more.

Middle

At the same time, it will discourage consumers from buying so much. The price will continue rising until the shortage has thereby been eliminated. If on other hand consumers decide they want less of a good (or if) if producers decide to produce more, supply will exceed demand. The resulting surplus will cause the price of the good to fall. This will act as a disincentive to producers, who will supply less, since production will now be less profitable. It will encourage consumers to buy more. The price will continue falling until the surplus has thereby been eliminated. The price, where demand equals supply is called the equilibrium price. By equilibrium we mean a point of balance or a point of rest: in other words a point towards which there is a tendency to move. The same analysis can be applied to labour (and other factor) markets, except that here the demand and supply roles are reversed. Firms are the demanders of labour. Households are the suppliers. ...read more.

Conclusion

A change in supply: - A rise in supply is signalled by a fall in price. This then acts as an incentive for consumer to buy more: the quantity demanded rises. A fall in supply is signalled by a rise in price. This then acts as an incentive for consumers to buy less: the quantity demand falls. Conclusion: - If the demand for a good exceeds the supply, there will be a shortage. This will lead to a rise in the price of the good. If the supply of a good exceeds the demand, there will be a surplus. This will lead to fall in the price. Price will settle at the equilibrium. The price equilibrium price is the one that clears the market: the price where demand equals supply. This is shown in a demand and supply diagram by the point where the two curves intersect. If the demand or supply curves shift, this will lead either to a shortage or to a surplus. Price will therefore either rise or fall until a new equilibrium is reached at the position where the supply is reached at the position where the supply and demand curves now intersect. ...read more.

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