Discuss about the Economic Principle and Demand States.
The law of demand states that more will be demanded when share price in market reduces and when their prices increase, less will be demanded, when other factors remain constant. Law of supply indicates that at high prices, more is supplied and at low price, less is supplied. When the buyers’ income increases, more shares will be demanded hence increasing its price, similarly the supply of shares will increase and if the disposable income of the buyer reduces, the shares becomes unaffordable, the supply reduces, price increases hence less of the shares will be demanded.
Movement along a supply curve is caused by alterations in price, for instance if the value increases from A0 to A1 the quantity to be supplied should increase from S0 to S1. And when price reduces from A1 to A0 the supply will reduce from S1 to S0. Shift in supply is caused by factors such as decline in the cost of production. If the cost production reduces the supply curve shifts to the right meaning that there is an increase in quantity supplied and if the cost production increases, the supply curve moves to the left meaning that there is a reduction in the quantity of goods to be supplied. Therefore movement in the demand curve and change in supply curve brings about a state of equilibrium where the supply and demand curves meet hence setting market price.
Price elasticity is the responsiveness to change in demand due to change in price. Price elasticity can as considered as a % change in amount needed divided by % change in price. For example if when quantity demanded rises by 15% due to decrease in price by 10%, the elasticity would be 1.5. The elasticity is important as it enable businesses to forecast pricing on a product.
It would be prudent for owner of the restaurant not to heed to the advice of the chef. Because if price is moderately flexible, a price reducing brings an increase in the total proceeds. In this case, when the price is flexible, falling in price brings an increase in the buyers’ spending thereby increasing the total revenue. The elasticity of demand in change of price from $ 7 to $ 5 gives a percentage change in price of 28 giving a negative elasticity.
Profit in the sense of accounting, is the amount by which the total revenue exceeds the total cost and the economic profit is simply the amount that is adequate to settle the total cost of production that is return on capital for safe investment. In economic view, profit simply should cover the owner’s costs and nothing excess while in accounting there must be an excess over the total costs. For example in a competitive, lowering the price so as to increase the demand to extent that losses are not made but costs are covered. Product differentiation would also be a great deal so as to secure market.
Factor productivity and variable costs both increase as the total production volume increases. If the variable cost declines, the variable cost curve slopes negatively meaning that the marginal cost is less than the average variable cost similarly, when average variable cost rises, the average variable curve positively slopes implying that marginal cost is more than the variable cost. It can be assumed that there is profit maximization on production in the short-run. The average curves and the marginal productivity show the cost of product the firm incurs.
The revenue got from sale of every unit of output is calculated by dividing revenue collected by the output quantity. In determination of profit, average revenue is subtracted from the average cost, therefore average revenue is equal to price.in a perfect competition market, marginal revenue is equal to average revenue but not price and in other market structures like oligopoly, marginal revenue is higher than the marginal cost hence price is not always equal to marginal revenue .