Economics- Learning for a Manager

Market Mechanism: Market mechanism is a term from economics referring to the use of money exchanged by buyers and sellers with an open and understood system of value and time trade-offs to produce the best distribution of goods and services. The use of the market mechanism imply in a free market; there can be captive or controlled markets which seek to use supply and demand, or some other form of charging for scarcity, both in social situations and in engineering. This is a main term when it comes to marketing in economics. In this we have three types of economy free market economy, command or planned economy and mixed economy. In free market economy all the resources are allocated by private sector(Individuals, households and group of individuals), in planned economy all the resources are owned by the public sector(local and central govt.) and in mixed economy the resources are owned by both private and public sector. A continuous flow of production, income and expenditure is known as circular flow of income. It is circular because it has neither any beginning nor an end. The circular low of income involves two basic principles: 1.In any exchange process, the seller or producer receives the same amount what buyer or consumer spends. 2. Goods and services flow in one direction and money payment to get these flow in return direction, causes a circular flow. Introduction to Demand and Supply: For a long period of time economists are much interested to study the relationship of price and sales. An in-depth knowledge of such relationship is necessary for the management Law of Demand Among the many causal factors affecting demand, price is the most significant and the price- quantity relationship called as the Law of Demand is stated as follows: The amount demanded increases with a fall in price and diminishes with a rise in price. Demand Schedule It is a list of alternative hypothetical prices and the quantities demanded of a good corresponding to these prices. It refers to the series of quantities an individual is ready to buy at different prices. Suppose a clothing manufacturer desires information about the impact of its pricing decisions on the demand for its jeans in a small foreign market. To obtain this information, it might engage in market research to determine how many pairs of

jeans consumers would purchase each year at alternative prices per unit. The numbers from such a market survey would look something like those in Table. The market research reveals that if jeans were priced at $10 per pair, 60,000 pairs of jeans would be sold per year; at $30 per pair, 20,000 pairs of jeans would be sold annually.

The market research reveals that, holding all other things constant, the quantity of jeans consumers are willing and able to purchase goes down as the price rises. This fundamental economic principle is known as the law of demand: Price and quantity demanded are inversely related. That is, as the price of a good rises (falls) and all other things remain constant, the quantity demanded of the good falls (rises).

Economists recognize that variables other than the price of a good influence demand. For example, the number of pairs of jeans individuals are willing and financially able to buy also depends on the price of shirts, consumer income, advertising expenditures, and so on. Variables other than the price of a good that influence demand are known as demand shifters.

The movement along a demand curve, such as the movement from A to B, is called a change in quantity demanded. Whenever advertising, income, or the price of related goods changes, it leads to a change in demand; the position of the entire demand curve shifts. A rightward shift in the demand curve is called an increase in demand, since more of the good is demanded at each price. A leftward shift in the demand curve is called a decrease in demand. For example, advertising that promotes the latest fad in clothing may increase the demand for a specific fashion item by making consumers perceive it as "the" thing to buy.

Thus, the demand function for good X can be written as:

Where Qdx represent the quantity demanded of good X, Px the price of good X, Py the price of a related good, M income, and H the value of any other variable that

affects demand, such as the level of advertising, the size of the population, or consumer expectations. Supply schedule: In a competitive market there are many producers, each producing a similar product. The market supply curve summarizes the total quantity all producers are willing and able to produce at alternative prices, holding other factors that affect supply constant. While the market supply of a good generally depends on many things, when we graph a supply curve, we hold everything but the price of the good constant. The movement along a supply curve, such as the one from A to B in figure, is called a change in quantity supplied. The fact that the market supply curve slopes upward reflects the inverse law of supply: As the price of a good rises (falls) and other things remain constant, the quantity supplied of the good rises (falls). Producers are willing to produce more output when the price is high than when it is low.

Variables that affect the position of the supply curve are called supply shifters, and they include the prices of inputs, the level of technology, and the number of firms in the market, taxes, and producer expectations. Whenever one or more of these variables changes, the position of the entire supply curve shifts. Such a shift is known as a change in supply. The shift from S0 to S2 in figure is called an increase in supply since producers sell more output at each given price. The shift from S0 to S1 in figure represents a decrease in supply since producers sell less of the product at each price. Market Equilibrium: The equilibrium price in a competitive market is determined by the interactions of all buyers and sellers in the market. The concepts of market supply and market demand make this notion of interaction more precise: The price of a good in a competitive

market is determined by the interaction of market supply and market demand for the good. The figure depicts the market supply and demand curves for such a good. To see how the competitive price is determined, let the price of the good be PL. This price corresponds to point B on the market demand curve; consumers wish to purchase Q1units of the good. Similarly, the price of PL corresponds to point A on the market supply curve; producers are willing to produce only Q0 units at this price. Thus, when the price is PL, there is a shortage of the good; that is, there is not enough of the good to satisfy all consumers willing to purchase it at that price.

In situations where a shortage exists, there is a natural tendency for the price to rise. As the price rises from PL to Pe in the above figure, producers have an incentive to expand output from Q0 to Qe. Similarly, as the price rises, consumers are willing to purchase less of the good. When the price rises to Pe, the quantity demanded is Qe. At this price, just enough of the good is produced to satisfy all consumers willing and able to purchase at that price; quantity demanded equals quantity supplied. Suppose the price is at a higher level-say, PH. This price corresponds to point F on the market demand curve, indicating that consumers wish to purchase Q0 units of the good. The price PH corresponds to point G on the market supply curve; producers are willing to produce Q1 units at this price. Thus, when the price is PH, there is a surplus of the good; firms are producing more than they can sell at a price of PH. Whenever a surplus exists, there is a natural tendency for the price to fall to equate quantity supplied with quantity demanded. As the price falls from pH to Pe, producers have an incentive to reduce quantity supplied to Qe. Similarly, as the price

falls, consumers are willing to purchase more of the good. When the price falls to Pe, the quantity demanded is Qe; quantity demanded equals quantity supplied.

Thus, the interaction of supply and demand ultimately determines a competitive price, Pe, such that there is neither a shortage nor a surplus of the good. This price is called the equilibrium price and the corresponding quantity, Q e, is called the equilibrium quantity for the competitive market. Once this price and quantity are realized, the market forces of supply and demand are balanced; there is no tendency for prices either to rise or to fall. For example, soon after the release of its latest Galaxy S3 in May 29, Samsung fell short to meet demands for the device. Samsung might have been caught off-guard by the overwhelming popularity generated by its latest smartphone. The supply shortages are no doubt the result of immense demand created prior to the release date by widely positive reviews that the Samsung Galaxy S3 has received. Hence we see that the raise in demand has resulted in shortage and thus increase in the manufacturing of the device by Samsung to move towards equilibrium of the demand and supply curve.