Economics For Managers
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Chapter 2 : Theory Of Demand And Supply
Demand Theory
Law of Demand
Determinants of Demand
Nature of Demand Curve
Elasticity Of Demand
Price Elasticity of Demand
Cross Elasticity of Demand
Income Elasticity of Demand
Advertising or Promotional Elasticity of Demand
Supply Theory
Determinants of Supply
Law of Supply
Elasticity Of Supply
Types of Supply Elasticity
Equilibrium Of Supply And Demand
Effect of a Shift in Supply and Demand
Prices Fixed by Law: Maximum Ceiling and Minimum Floor Price
Chapter Summary
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In this chapter, we have studied the factors that determine
the demand and supply of a product. An organization should fix the price of its
products in such a way that the demand for the product should match its supply.
Excess demand leads to an increase in the price, leading to increase in the
firm's profits. High profits attract other firms to the industry leading to an
increase in competition and a consequent fall in the price in the longer run.
This may also result in oversupply leading to a fall in price. Variations in
demand and supply should be taken into consideration by a firm before it decides
to manufacture a product. Managers as well governments take into consideration
the elasticity of demand for a product in their decision making. Before fixing
the price of a product, managers should know the elasticity of demand for that
particular product. |
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If the demand for a product is inelastic, an increase in price will increase
the profit of the firm. On the contrary, if the firm increases the price of
a product, the demand for which is elastic, the demand will fall, as
customers'shift to substitute goods. Thus if the price of a commodity
increases the demand for its substitute also increases. Governments should
have a good idea of the elasticity of demand for various products before
fixing taxes.
If the government imposes higher taxes on products with elastic demand, the
demand for these products decreases and the government cannot increase its
income. Taxes levied on commodities for which the demand is inelastic,
brings in additional revenue for the government. In order to protect
customers, governments sometimes fix the maximum price that can be charged
for a product. The government also fixes the floor prices for certain
commodities.
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