Supply and demand is perhaps one of the most fundamental

concepts of economics and it is the backbone of a market

economy. Demand refers to how much (quantity) of a product or
service is desired by buyers. The quantity demanded is the amount of
a product people are willing to buy at a certain price; the
relationship between price and quantity demanded is known as the
demand relationship. Supply represents how much the market can
offer. The quantity supplied refers to the amount of a certain good
producers are willing to supply when receiving a certain price. The
correlation between price and how much of a good or service is
supplied to the market is known as the supply relationship. Price,
therefore, is a reflection of supply and demand.

The relationship between demand and supply underlie the forces

behind the allocation of resources. In market economy theories,
demand and supply theory will allocate resources in the most
efficient way possible. How? Let us take a closer look at the law of
demand and the law of supply.

A. The Law of Demand

The law of demand states that, if all other factors remain equal, the
higher the price of a good, the less people will demand that good. In
other words, the higher the price, the lower the quantity demanded.
The amount of a good that buyers purchase at a higher price is less
because as the price of a good goes up, so does the opportunity cost
of buying that good. As a result, people will naturally avoid buying a
product that will force them to forgo the consumption of something
else they value more. The chart below shows that the curve is a
downward slope.
A, B and C are points on the demand curve. Each point on the curve
reflects a direct correlation between quantity demanded (Q) and
price (P). So, at point A, the quantity demanded will be Q1 and the
price will be P1, and so on. The demand relationship curve illustrates
the negative relationship between price and quantity demanded. The
higher the price of a good the lower the quantity demanded (A), and
the lower the price, the more the good will be in demand (C).

B. The Law of Supply

Like the law of demand, the law of supply demonstrates the
quantities that will be sold at a certain price. But unlike the law of
demand, the supply relationship shows an upward slope. This means
that the higher the price, the higher the quantity supplied. Producers
supply more at a higher price because selling a higher quantity at a
higher price increases revenue.
A, B and C are points on the supply curve. Each point on the curve
reflects a direct correlation between quantity supplied (Q) and price
(P). At point B, the quantity supplied will be Q2 and the price will be
P2, and so on. (To learn how economic factors are used in currency
trading, read Forex Walkthrough: Economics.)

Time and Supply

Unlike the demand relationship, however, the supply relationship is a
factor of time. Time is important to supply because suppliers must,
but cannot always, react quickly to a change in demand or price. So
it is important to try and determine whether a price change that is
caused by demand will be temporary or permanent.

Let's say there's a sudden increase in the demand and price for
umbrellas in an unexpected rainy season; suppliers may simply
accommodate demand by using their production equipment more
intensively. If, however, there is a climate change, and the population
will need umbrellas year-round, the change in demand and price
will be expected to be long term; suppliers will have to change their
equipment and production facilities in order to meet the long-term
levels of demand.
Quantity demanded is a term used in economics to describe the total amount of goods
or services demanded at any given point in time. It depends on the price of a good or
service in the marketplace, regardless of whether that market is in equilibrium. The
degree to which the quantity demanded changes with respect to price is called
the elasticity of demand.

Assuming non-price factors are removed from the equation, a higher price results in a
lower quantity demanded, and the opposite is true as well: A lower price increases the
quantity demanded. Therefore, quantity demanded is directly related to the law of
demand, which states the price and demand are inversely related.

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A Theory of Individual Behavior dispels the notion that individuals act as

rational agents and strives to capture idiosyncratic humanness through
rigorous mathematics. Wichers describes a version of economic behavior that
is more comprehensive and satisfying than neoclassical models yet still
consistent with the usual aggregated concepts that form the basis of applied
microeconomics. Written in an accessible and convincing style, A Theory of
Individual Behavior discusses innovative material in a format that encourages
classroom use. All chapters have questions at their conclusions, and there is a
strong emphasis on testable results. The book contains a short review of
mathematical models and discussion of received microeconomic theory, as
well as summaries at the ends of chapters and many examples and
illustrations.

Consumer behaviour is the study of how individual customers,

groups or organizations select, buy, use, and dispose ideas,
goods, and services to satisfy their needs and wants. It refers to
the actions of the consumers in the marketplace and the
underlying motives for those actions.

Marketers expect that by understanding what causes the

consumers to buy particular goods and services, they will be
able to determine—which products are needed in the
marketplace, which are obsolete, and how best to present the
goods to the consumers.

ADVERTISEMENTS:

The study of consumer behaviour assumes that the consumers

are actors in the marketplace. The perspective of role theory
assumes that consumers play various roles in the marketplace.
Starting from the information provider, from the user to the
payer and to the disposer, consumers play these roles in the
decision process.
The roles also vary in different consumption
situations; for example, a mother plays the role of an
influencer in a child’s purchase process, whereas she
plays the role of a disposer for the products
consumed by the family.What is Production Cost
Production costs refer to the costs incurred by a business when
manufacturing a good or providing a service. Production costs
include a variety of expenses, such as labor, raw materials,
consumable manufacturing supplies, and general overhead.
Additionally, taxes levied by the government or royalties owed
by natural resource extracting companies are also considered
production costs.

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Production Cost

BREAKING DOWN Production Cost

Also referred to as the cost of production, production costs
include expenditures relating to the manufacturing or creation
of goods or services. For a cost to qualify as a production cost, it
must be directly tied to the generation of revenue for the
company. Manufacturers experience production costs relating
to both the materials required to create an item as well as the
labor need to create it. Service industries experience production
costs in regard to the labor required to provide the service as
well as any materials costs involved in providing the service.

In production, there are direct costs and indirect costs. For

example, direct costs for manufacturing an automobile are
materials, such as plastic and metal materials and the labor
required to produce the finished product. Indirect costs include
overhead, such as rent, administrative salaries, and utility
expenses.

Deriving Unit Costs for Product Pricing

To figure out the cost of production per unit, the cost of
production is divided by the number of units produced. Once
the cost per unit is determined, the information can be used to
help develop an appropriate sales price for the completed item.
To break even, the sales price must cover the cost per unit.
Prices exceeding the cost per unit result in profits, whereas
prices below the cost per unit result in losses.

If the cost of producing a product exceeds the price, producers

may consider temporarily or permanently cease operations. For
example, in December 2018, the selling price of a barrel of oil
fell to $45 a barrel. With production costs varying from $20 to
$50 a barrel, a cash negative situation occurs for those with
production costs on the higher end. Those producers may
choose to cease production efforts until sale prices return to
profitable levels.

Production Costs and Asset Recording

Once a product is complete, it can be recorded as a company
asset until the product is sold. This allows the value of the
product to be accounted for in financial statements and other
accounting documents, and it keeps shareholdersinformed and
reporting requirements met.

Pricing strategy revolves around three main points: cost and profit objectives, consumer
demand and competition. To set a price, first add all your costs together and subtract any
other sources of revenue: this is the minimum profit you need to break even, so this
number defines your minimum price. Consider your customers and the demand for your
product to determine your maximum selling price. Now that you have a price range, use
profit objectives and information about your competition to choose the best price.

Pricing Theory

Pricing is either cost-based, demand-based or competition-based. In cost-based pricing,

you set prices based purely on production costs and the desired profit without considering
the demand. In demand-based pricing, consumer research helps to ascertain the
acceptable price range, then you can determine profit and cost requirements within that
range. In competition-based pricing, you set your prices based on your competitors.
Depending on customer loyalty, or brand differences, you might be selling at, above or
below market price.

Main Strategies

Use premium pricing when you have a serious advantage over the competition: you can
charge a high price for uniqueness. When you’re new to a market and need to gain
customer loyalty, try penetration pricing: set your prices extra-low to gain market share
and then raise them later. When you start out with a competitive advantage, but know it
won’t last, try skimming. The opposite of penetration pricing, skimming allows you to make
more profit in the beginning and then lower prices to remain competitive later. Economy
pricing is straight low price: keep your costs low to keep the prices low and still turn a
profit.

Psychological Pricing

Psychological pricing means setting the price so that customers have a positive emotional
reaction. For instance, United States gasoline prices are always listed to a hundredth of a
dollar. If the price is $3.139/gallon, consumers read this as $3.13, but marketers actually
charge $3.14 since we round up to the nearest penny. It’s all about perspective, and
customers often see odd price values as more attractive or lower than they really are.

Product Oriented Pricing

Certain product relationships allow you to change your pricing strategy. Adding optional
extras, such as airline charges for extra baggage, or selling products in a bundle, hides
the true cost from your consumer. When your product has a partner, such as a razor and
blades, you can price the initial purchase (razor) low and recoup the costs with the
secondary purchase (unique blades). Finally, consider promotional pricing such as
buy-one-get-one-free to draw customers to your product with the hope that they will
continue buying after the promotion ends.
The primary subject matter of this case is Economic Theory. This case is a study of Advisors
Unlimited, a small financial services business started by two entrepreneurs and examine the
business owners' use of economic theory in their business strategy. Economic theory and how
it influenced their decisions involving their operations strategy will also be explored, focusing
on the areas of business environment, economic profit, marginal analysis, consumer behavior
and oligopoly strategies.

CASE SYNOPSIS

Located in Hagatna, Guam, Advisors Unlimited was formally incorporated on November 11,
2000. Advisors Unlimited was founded by Frank Salas and Florence Martinez to provide
services including: Investment advisory, financial planning, personal and business retirement
plans, as well as life insurance long-term care insurance and supplemental health insurance
plans. The founders created a company for those clients who are serious about investing and
growing their money, for whatever reason (retirement, college savings, and personal growth).
Clients also could get individualized, expert advice locally.

Frank Salas and Flo Martinez had previously worked together at a company called Asia Pacific
Investment Services (APIS), which is now called Asia Pacific Financial Management
Group(APFMG). Salas was the leading Registered Representative and producer at APIS.
Salas focused primarily on high net worth individuals who would produce the most revenue
and had the most growth potential for company. This group took approximately the same
amount of time and effort for the company as the clientele with smaller sums of money to
invest, but yielded a much greater return. Martinez was Chief Financial Officer (CFO) and
Treasurer for APIS, and handled the numerous responsibilities that come with that position in a
financial services company. Special challenges in this industry include: extremely rigorous and
thorough regulation from government regulatory agencies such as the Securities and
Exchange Commission and the National Association of Securities Dealers. APIS offered
virtually the same product lines that Advisors Unlimited would eventually come to offer.
INSTRUCTORS' NOTES

This case should follow up the teaching of the basics of Economic Theory to entry level
economic students. This case study analysis allows student to apply the basics of Economic
Theory to a start-up entrepreneurial venture. The case covers a financial services start-up and
focuses in the areas of business environment, economic profit, marginal analysis, consumer
behavior, and oligopoly.

DISCUSSION QUESTIONS AND RECOMMENDED ANSWERS

1. What affect does having a business located on an isolated island have on a business as
compared to a business that exists in a large city in a large state? (Business environment)

Answers include the following:

In a small market, relationship marketing and reputation is very important. If the company has
a good reputation, this can benefit the business. However, if the company develops problems,
this could negatively impact their ability to be successful.

2. What might be a negative ramification of patterning your customer profile to include those
with higher net-worth and previous investment experience? (Consumer behavior)

Answers include the following:

The client--investor relationship is usually based on trust and developing a long-term

relationship. Advisors Unlimited may be missing out on younger, less asset-rich clients who
are just beginning their investment stage, but will eventually be the most asset-rich clients.

3. What are the economic benefits and challenges when in the start-up phase of a business
that you own? (Economic profit)

Answers include the following:

Challenges: Limited cash flow, developing your clientele basis, little income for the owners
until the business grows

Benefits: Being your own boss, the potential for make unlimited income

4. What are some of the challenges in being in the financial services industry? (Business
environment)

Answers include the following:

Challenges: Extremely stringent industry regulation and changes in regulation, frequent

auditing by governmental agencies

5. Advisors Unlimited uses a lower price strategy as part of their marketing strategy. What are
some of the economic ramifications of using that as part of a strategy? (Marginal analysis)

Answers include:

If the profit margin is too low because of lower revenue, the company may experience a
problem with cash flow. Also, lowering price is a much easier strategy for competitors to adopt,
as compared to a product and services distinction strategy.
6. What are the advantages of being small and locally owned in a Guam's market? (Oligopoly
strategies)

Guam's market is small, with two gigantic firms (Citi Smith Barney & Merrill Lynch) who
dominate the landscape. Advisors Unlimited, while lacking size and international status, has
the advantage of being locally owned, which allows them the ability to make quick decisions
without having to wait for off-island corporate approval. There also is a certain amount of trust
from clients, who may prefer to deal with someone face-to-face who is a member of the local
community and has common history, tradition and culture.

Francisco T. Salas, Jr., University of Guam

Karri T. Perez, University of Guam