The demand curve shows the connection between the price of a good and the quantity of the good demanded. The price is on the vertical axis and the quantity demanded on the horizontal axis. The demand curve shows us how the quantity demanded changes as price rises or falls. Supply Curve This is the connection between the price of a good and the quantity of the good supplied. Diagram showing the Equilibrium Price and Quantity The equilibrium price and quantity is the point where demand and supply meet, in this case as you can see in the above diagram they meet at i?? 6. 00 and at 1100 units.
Question one (b) Price floor A definition of price floors is when a price floor exists when the price is artificially held above the equilibrium price and is not allowed to fall. With a price floor at i?? 10. 00 the graph below shows the effects it would have. The equilibrium price is i?? 6. 00. The price floor is at i?? 10. 00, at this price the quantity demanded is 300 and the quantity supplied is 1900, leaving a surplus of 1600. Price ceiling A definition of price ceiling is when the price is artificially held below the equilibrium price and is not allowed to rise.
The graph below shows the effects that a price ceiling of i?? 5. 00 would have. The price of the good is limited to be i?? 5. 00. At this price the quantity demanded is 1300 units and the quantity supplied is 900 units meaning there is a shortage of 40 units. Question one (c) I have been asked to calculate the Price Elasticity of Demand (PED), in order to calculate these an equation is needed, the equation looks like this. Profit maximisation is when firms seek to make the largest surplus of revenue over cost, possible.
The profit maximizing rule is when profit is maximized when marginal revenue equals marginal costs. Plenty of businesses depart from pure profit maximisation in the short run in order to achieve alternative objectives. Firms must decide how much output to produce this is profit maximization. Total revenue – the amount of money the firm gets from the sale of output. Average revenue – revenue per unit sold. Marginal revenue – revenue gained by selling one additional unit. In the short-run, firms are constrained by their fixed.
In the long-run, they can change all variables, so larger profits are possible, however, larger profits are not equilibrium. If profits are being made, firms will enter the market, this shifts the supply curve out, lowering the market price, this occurs until there are no longer any economic profits. Similarly, if firms are losing money, firms leave the market, this shifts the supply curve in, raising the market price. This occurs until we reach zero economic profits. Long run equilibrium in perfect competition occurs where marginal cost, marginal revenue, average cost and average revenue are all equal.
Revenue maximisation Revenue maximisation is the money received from the sale of output. Maximisation of revenue is when a firm simply wants to maximise revenue and not so much the profit, for example performance related pay, meaning the more sales that are made the more pay that staff get. The criticism is made because the owners of the firm may not be the decisions makers. For instance, with public limited companies the shareholders are the owners, however, the managers run the organisation. An alternative concept is the short run sales revenue maximisation theory:
The theory implies that managers will seek to maximise the number of sales. The reason for this is that managers may be judged by the level of sales. This is becoming increasingly important as the role of managers is becoming more focussed towards the sales function. In addition, manager’s salaries, power and prestige may depend directly on sales performance. To add further realism, an additional constraint for sales maximisation maybe that the shareholders will require a minimum profit level (and dividend) to keep them happy.
Therefore, the managers may also be profit satisfiers. This is where the decision makers in a firm aim for a target level of profit, with the aim of keeping all stakeholders in the company satisfied. Sales revenue is maximised at where total revenue is greatest, i. e where MR equals zero. The price and output decisions of the firm will differ depending on which maximising theory the firm. For instance, Sales maximisation will have a higher output level and lower price level compared to the profit maximisation. Utility maximisation
Economists use the term utility to describe the satisfaction or enjoyment derived from the consumption of a good or service. If we assume that consumers act rationally, this means they will choose between different goods and services so as to maximize total satisfaction or total utility. Consumers will take into consideration many objectives, such as how much satisfaction they get from buying and then consuming an extra unit of a good or service, the price that they have to pay to make this purchase, the satisfaction derived from consuming alternative products and the prices of alternatives goods and services.
Some economists claim that utility cannot be measured objectively. There are also doubts about the assumption of rational behaviour among consumers – particularly in a world where consumers cannot expect to have all the information available on the products available in a market. Company growth A company may want to expand, in which both the owners and managers must agree with, when a company expands it is known that as it is a larger firm the more power it has and higher salaries are paid. When a company grows, the growth may be either organic or inorganic.
Organic growth means that the company itself has grown from its own business activity, while inorganic growth means that the company has grown by merger or take-over. Organic growth is also sometimes known as internal growth and inorganic as external growth. Total benefits to society -everyone Marginal social benefit (MSC) is the benefit to society of consuming one extra unit of a product and can be illustrated on the following graph: The marginal private benefit curve (MPB) shows the benefit of an economic activity to the decision maker e. g. a consumer.
MPB is given by the market demand curve. The marginal external benefit curve (MEB) shows the estimated benefit of an economic activity enjoyed by third parties The marginal social benefit curve (MSB) is the total benefit to society of using an extra unit of a good i. e. MSB = MSB + EMB.
Business Economics learning pack for BAIB, pack 47 John Sloman and Mark Sutcliffe, (1998) Economics For Business 2nd Edition David Begg, Stanley Fischer and Rudiger Dornbusch (2001) Foundations of Economics Alan Griffiths and Stuart Wall, Applied Economics 9th Edition