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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

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.

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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