BAYNA, TRIXIA MAE N.

 An increase in demand
12-BSA-01
The law of demand says that at higher prices,
MANAGERIAL ECONOMICS
buyers will demand less of an economic good.

The higher the price of a good, the less people will

Individual Problems demand that good. In other words, the higher the
price, the lower the quantity demanded. The amount
8.1
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.

“Market equilibrium is the price at which quantity

supplied equal quantity demanded. There are no
unconsummated wealth-creating transactions”. The
number of buyers and sellers are equal, so no pressure
for price to change.

Assumption: more than 1 widget sold or

bought. i.e. at $12 one seller will be willing to sell one,
at $16 two sellers, and so on. Similarly for buyers, at $
29 one buyer is willing to buy, at $24 two buyers, and
so on.
 An increase in supply
The equilibrium price is $20, and the quantity is 3
units. The law of supply says that at higher prices, sellers
will supply more of an economic good.
At a price higher than $20, say $29, the
quantity demanded (1) is less than the quantity This means that the higher the price, the higher
supplied (5), it means that 4 sellers are trying to sell to the quantity supplied. From the seller's perspective,
only one buyer. The sellers will compete with one the opportunity cost of each additional unit that they
another by offering to sell at lower price (wealth sell tends to be higher and higher. Producers supply
creating transaction). Similarly, at price $12, the more at a higher price because the higher selling price
quantity demanded (4) is greater than the quantity justifies the higher opportunity cost of each additional
supplied (1); four buyers are chasing one seller. Only at unit sold.
$20, the number of buyers and seller units equal at 3
units, no pressure on price to change and no
unconsummated wealth-creating transaction. At
equilibrium price, only buyers with value $20 and
above buy and only sellers with values $20 and below
sell. No one else wants to buy or sell.

8.2

a. An increase in price could be explained

by either:

b. Knowing whether quantity increased
or not would allow you to distinguish between the two
explanations. An increase in demand with no change in
supply would result in higher quantity.
A decrease in supply with no change in
demand would result in lower quantity. It turns out
that both explanations were actually contributing to
the higher prices according to an article in the Wall
Street Journal. “Cotton prices have been driven higher
by demand from developing countries, notably China
and India, where rising wealth is boosting
consumption patterns. Mother Nature is also to blame,
with the deadly floods in Pakistan and heavy rains in
China damaging many crops and limiting cotton
supply.”
9.2 The potential legalization of marijuana
would have different effects on different related
markets. In the category of recreational drugs, beer
and marijuana are likely substitutes. Legalization
would shift demand away from beer sales and thus
reduce the profits of beer distributors. We would
expect them to oppose legalization. On the other
hand, marijuana and snack foods are strong
complements (or so we are told). Legalization would
shift demand out for snack food companies and thus
increase their profits. We would expect them to
support legalization.
9.3 First, use the formula (P -MC) / P = 1 /
|elasticity| to determine marginal cost.  If the old price
is $10 with an elasticity of -2, marginal cost is $5.
(10 - MC)/10 = 1/2
10 - MC = 5
10 = 5 + MC
5 = MC
Next, use the same formula with the marginal cost and
the new elasticity to determine the price.  The new
price will be $7.50.
(P - 5)/ P = 1/3
P - 5 = 1/3 P
P = 1/3 P + 5
2/3 P = 5
P = 5(3/2)
P = 7.5

8.3 An increase in demand will usually

increase the price and, thus, greater production levels
are profitable. One way to do this is to increase
manufacturing capacity. However, capacity will be
increased for many years and the H1N1 flu is likely to
be a temporary phenomenon. That is, demand for
hand sanitizer is likely to return to pre-2009 levels in a
year or two. In this case, the extra capacity will likely
be idle and unprofitable.

9.1 The proposal will likely have no net

long-run effect. Higher housing benefits mean that
schools do not have to offer as much in other
incentives (e.g., pay) to new faculty members to
induce them to come to the university. Consequently,
the increased housing benefits will be offset with a
compensating reduction in the wages of new Faculty
members. Overall, any housing benefits, or lack
thereof, will be capitalized in the salary package
offered to the faculty member.