ME Assignment

MANAGERIAL ECONOMICS
Assignment
Abhishek Mohapatra
UMG18002
1. Explain how the law of demand affects market activity.
Demand is a relationship between the price of a product and the quantity

consumers are willing and able to buy for a period, other things constant.
According to the law of demand, quantity demanded varies negatively or
inversely, with the price. A demand curve slopes downward because a price
decrease makes consumers:
a) More willing to substitute this good for other goods, and
b) More able to buy the good because the lower price increases real
income.
2. Explain how the law of supply affects market activity.
Supply is the relationship between the price of a good and the quantity
producers are willing and able to sell per period, other things constant.
According to the law of supply, price and quantity supplied are usually
positively, or directly related, so the supply curve typically slopes upward.
The supply curve slopes upward because higher prices make producers:
a) More willing to supply this good rather than supply other goods that use
the same resources, and
b) More able to cover the higher marginal cost associated with greater
output rates.
3. Describe how the interaction between supply and demand creates

markets.
Demand and supply come together in the market for the good. A market
provides information about the price, quantity and quality of the good. In
doing so, a market reduces the transaction costs of exchange – the costs of
time and information required for buyers and sellers to make a deal. The
interaction of demand and supply guides resources and products to their
highest-valued use.
4. Describe how markets reach equilibrium.
Market equilibrium is the condition that exists in a market and occurs at the
price where quantity demanded equals quantity supplied, and the market
clears. Impersonal market forces reconcile the personal and independent
plans of buyers and sellers. Market equilibrium once established, will
continue unless there is a change in a determinant that shapes demand or
supply.
Example:
5. Explain how markets react during periods of disequilibrium.
Market disequilibrium is the condition that exists in a market when there is a

mismatch between quantity supplied and quantity demanded as the market
seeks equilibrium. Markets can’t always achieve equilibrium quickly. Until
they do, a period of disequilibrium occurs. Governments often impose:
a) Price floors – a minimum legal price below which a product cannot be

sold; to have an impact, a price floor must be set above the equilibrium
price.
b) Price ceilings – a maximum legal price above which a product cannot be
sold; to have an impact, a price ceiling must be set below the equilibrium
price.
These are often imposed to manage the uncomfortable market effects of
disequilibrium, like falling income or product surplus.
6. Explain the circular flow of income in the 2-sector model.
The circular flow model describes the flow of resources, products, income
and revenue among economic decision makers. It focuses on the primary
interaction in a market economy – between households and firms.
Households supply labour, capital, natural resources and entrepreneurial
ability to firms through resource markets and earn income for this. In return,
households demand goods and services from firms through product
markets, and spend their income here.
Firms demand labour and other resources to produce goods and services
through resource markets and pay for the resources. In return, the firms
supply goods and services through the product market and earn revenue.
The flow of resources and products are supported by the flow of income and
expenditure; i.e. by the flow of money.
7. What are the types of elasticity of demand?
Price elasticity of demand measures how responsive quantity demanded is

to a price change; the percentage change in quantity demanded divided by
the percentage change in price.
When the percentage change in quantity demanded exceeds the percentage
change in price, demand is price elastic. When the percentage change in
quantity demanded is less than the percentage change in price, demand is
price inelastic. When the percentage change in quantity demanded equals
the percentage change in price, demand is unit elastic.

ME Assignment

Uploaded by

ME Assignment

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MANAGERIAL ECONOMICS

Demand is a relationship between the price of a product and the quantity

2. Explain how the law of supply affects market activity.

3. Describe how the interaction between supply and demand creates

Market disequilibrium is the condition that exists in a market when there is a

a) Price floors – a minimum legal price below which a product cannot be

6. Explain the circular flow of income in the 2-sector model.

Price elasticity of demand measures how responsive quantity demanded is

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