Understanding Market Trends and Managerial Economics

The assignment report concludes that economics plays a significant role in understanding various market trends and provides a basis for managerial reactions. Managerial economics helps in knowing the relation between demand, supply, equilibrium price, and quantity. The report also discusses perfect competition, elasticity of demand, and government intervention in market failure, providing insights into the telecommunication sector in UAE.

Managerial Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
SECTION “A”.................................................................................................................................1
1) Effect on demand curve, supply curve, equilibrium price and equilibrium quantity of events
......................................................................................................................................................1
2) Features of Perfect Competition..............................................................................................8
3) Point at which firm should stop hiring worker in a perfect competitive market form............9
4) Computation of elasticity.......................................................................................................10
5) Tools for government intervention to deal with market failure.............................................13
SECTION “B”...............................................................................................................................14
1) a. Supply schedule and the various factors affecting the supply in the market.....................14
b. Graph showing changes in the equilibrium price and quantity due to change in supply.......15
2) a. Characteristics of the emerging market form in the telecom industry...............................16
b. Pricing policy used in Oligopoly industry.............................................................................17
c. Profit maximisation strategy..................................................................................................17
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Managerial economics is used synonymously with business economics. It is a branch of
economics that deals with the application and analysis to decision making technique used in
business by its management units. This economics theory is used to bridge the gap between
“theory and practice”. That will help in covering the gap between the problems of logic and the
problems of policy. It helps the management by using analytical skills and highly developed
techniques in solving complex issues of successful decision making and planning for future. This
economics theory helps managers to recognize how economic forces affect organisations and
describes the economic consequences. In this project report information related to demand,
supply and equilibrium price and quantity is mentioned (Bazerman and Moore, 2013). Together
with this different types of market and response of businesses to them. Elasticity of demand and
supply and related concepts are elaborated. Pricing policies and profit maximizing strategies with
suitable graphs is described.
SECTION “A”
1) Effect on demand curve, supply curve, equilibrium price and equilibrium quantity of events
a. The market of newspaper in town
Case 1: The salaries of journalists go up.
Increase in the salary of the journalists will leads to rise in the cost of the products that
will ultimately change the price of the newspaper. The graph of this is as follows-
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A newspaper is a product that possess relatively inelastic demand. That means
percentage change in quantity demanded is less then percentage change in price of the product.
As newspaper is a kind of necessary good whose quantity demanded will be affected by rise in
price of the goods but this effect will be less then price change. As rise in cost will result in price
of the product and equilibrium price will also be affected and will get reduced. Together with
this equilibrium quantity will also reduced due to rise in price (Ben-David, Graham and Harvey,
2013).
Case 2: Their is a big news event in town, which is reported in the newspaper
This event will leads to increase in demand of newspaper demanded. To satisfy the
quantity demanded there is a need to increase in the supply of newspaper and price of the
product will also be affected.
From the above graph it can be analysed that when demand of newspaper increases and
relatively supply will not be increased then prices of the product will moves up. Equilibrium
price will increase and equilibrium quantity will reduced. When supply is also increased then it
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will not affect the price of newspapers but will give new equilibrium quantity demanded with
same equilibrium price (Beyer, Czarnitzki and Kraft, 2012).
b. The market of St. Louis Rams(a football team) cotton T-shirt
Case 1: The Rams win the Super Bowl competition
In the given case scenario it is assumed that supply of the T-shirts will not be increased
and that will results to hike in price of T-shirts. As Rams win the competition increase in the
quantity demanded of the product will be recorded. No change in supply will increase
equilibrium price and equilibrium supply will be recorded (Fort, 2015).
Case 2: The price of cotton increases.
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From the above graph it is analysed that rise in the price of the raw material used in t-
shirt manufacturing will hike price of the t-shirt. As price and demand have inverse relationship
this will reduce quantity demanded of the product. Supply of t-shirt will increase as there is a
positive relationship between price and supply. This will change the equilibrium price and by
assuming that demand and supply will change in same proportion then it will not affect
equilibrium quantity (Foxall, 2016).
c. The market for bagels
Case 1: Peoples realise how fattening bagels are.
This realisation will leads to fall in the quantity demanded for bagels. A fall in demand
leads to rise in the supply of product and in this situation price of the product will fall for sure.
There will be change in equilibrium price and it is assumed that demand and supply change in
same proportion and no change in equilibrium supply is noted.
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Case 2: People have less time to make themselves a cooked breakfast
When people have less time to prepare food at home then demand for cooked food will
increase. This rise in demand will leads to hike in price of the product demanded. Their will be
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fall in the quantity supplied and equilibrium price will increase and equilibrium quantity will also
be affected if change in quantity and demand is not in same proportion.
d. The market for the Krugman and Wells economics text book
Case 1: When professor makes it required reading this book for all the students.
When book become compulsory to be read by all students then their will be shift in the
demand curve to the right that means rise in the quantity demanded. Supply curve will shift to
left and supply will reduce. Equilibrium price will be more then before and equilibrium quantity
for book after increased demand will be less then before (Graham, Harvey and Puri, 2013).
Case 2: Printing cost for textbooks are lowered by the use of synthetic paper.
When cost of manufacturing a product reduces that affects price of the product and make
it lower. Reduction in price of the product increases in demand of text books. Supply of the
products will be reduced and equilibrium price will increase with reduction in equilibrium
quantity. A fall in supply will be less then in comparison to quantity demanded being treating the
product as relatively inelastic.
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2) Features of Perfect Competition
Perfect competition is a market structure where a large number of buyers and sellers are
present and all are engaged in buying and selling of the homogeneous products at single price
prevailing in the market. It is a market structure where competition is at its greatest level.
Following features are essential for existence of perfect competition-
Large number of buyers and sellers: In perfect competitive market their availability of
buyers and sellers must be so large that no single person can influence the price and output of the
industry as whole. For Example- This feature of Perfect competition can be seen in clothing
market as availability of quantity for buyers and sellers are quite high.
Homogeneity of the product: Products that are offered and sold in the competitive
market are quite same or homogeneous. No buyer has any preference for the product of an
individual seller over others. For Example- Fast food offered in the market is quite smiler.
Free entry and exit of firms: In a highly competitive markets organisations are free to
enter and exit in the market. Profitability in the industry attracts large number of businesses to
enter and if losses are incurred then firm leave the market. For Example- Food business is quite
attractive for profit and many businesses organisations enter in this sector and many exit after
incurring losses (Paola and Scoppa, 2012).
Perfect knowledge of the market: In competitive market buyers and sellers available in
the market possess complete knowledge about the prices at which goods are being bought and
sold. This brings uniformity in price. For example- Food that is offered by various competitors
will be available in the market with negligible difference in the price to attract more consumers.
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Absence of price control: In competitive market there should be complete openness in
buying and selling of goods. Prices of the product are changed in response to demand and supply
condition. For Example- Technology industry is highly responding with the demand for the
product and can not control price of the product in the industry.
Perfect mobility of factors of production and goods: There should be perfect mobility
of goods and factors between the industries in competitive market. Goods and services are free to
move to fetch highest profits. For Example- Products that are provided by farmers are free to
move in the markets that will fetch highest profits to them and enhance mobility.
Independent relationship between buyer and sellers: There should not be any
attachment between seller and buyer of the goods and services in competitive market. For
Example- Instead of few peoples all are not related to business organisation and termed as
independent for any business industry.
3) Point at which firm should stop hiring worker in a perfect competitive market form
Market for labour have demand and supply curve, just like markets for goods. The law of
demand which states that price of the product and its demand have inverse relationship also
applies to labour. A higher salary or wage leads to higher price in labour market that leads to a
decrease in the quality of labour demanded by employers. On the other hand a lower salary or
wages will increase the quantity of labour demanded. The law of supply which says that keeping
other factors constant, an increase in the price results in an increase in the quantity supplied. The
higher price of labour leads to a higher quantity of labour supplied and vice versa a lower price
leads to a lower quantity supplied (Png, 2013).
Equilibrium in the labour market: It is a situation when business organisation should
stop hiring workers in perfectly competitive market. This is a situation which will be achieved by
business organisations when amount of labour demanded in the business matches with the supply
or number of employees hired in the business. At equilibrium wage rate of employees will be as
per market rate. The equilibrium market wage rate is at the intersection of the supply and
demand for labour. Employees are hired in the organisation up to the point where the extra cost
of hiring an employee is equal to the extra sales revenue from selling their output. After this
point business entity should stop hiring employees in the organisation.
Example-
Cost of Hiring Extra sales volume Hired or stop hiring
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5000 7000 Hired
10000 10000 Hired
15000 14000 Stop hiring
Interpretation: From the above line chart it is determined that business organisation will
continue to hire labour force up to the point where cost of hiring them will be more or equal to
extra sales made by them that is 10000. when cost of hiring rises them company should stop
hiring otherwise loss will be incurred.
4) Computation of elasticity
Elasticity is the measurement of how an economic variable responds to a change in
another variable. The elasticity of demand refers to how sensitive the demand for a good is to
change on other economic variables such as price and consumer income. It shows how reactive
the demand of the product when price and income of consumer group changes. It can be said that
price of the product and income of consumer group are the most reactive factors to influence
demand of the product.
a. Price of the Envelops= $3/per box
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1 2 3
0
2000
4000
6000
8000
10000
12000
14000
16000
7000
10000
14000
Cost of Hiring
Extra sales volume

Demand at this price= 10 boxes
Price gone up to $3.75 a box and demand become 8 boxes.
Price Elasticity of demand= Percentage change in the quantity demanded /
Percentage change in the price of the product
Percentage change in the price= [(3.75-3.00) / (3.75+3.00/ 2)]*100
= 22.22%
Percentage change in quantity demanded= [(10-8)/ (10+8/2)]*100
= 22.22%
Elasticity of demand= 22.22 % / 22.22 %= 1
(Source: Unitary Elasticity, 2019)
As, the percentage change in the price of the product is equal to the percentage change in
the quantity demanded then it will be termed as unitary elasticity of demand that means elasticity
will result 1. From that it is been concluded that Jacky's elasticity of demand is unitary. The
effect of change in price of the product will result in same proportion of reduction in the amount
of quantity demanded (Unitary elasticity, 2019).
b. Price elasticity of supply is the responsiveness of the quantity supplied to a change in
price, measured by dividing percentage change in quantity supplied of the product by percentage
change in the product price. As per law of supply price elasticity of supply will be a positive
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Illustration 1: Unitary Elasticity, 2019

number. If the price elasticity of supply is less then 1, then supply is inelastic. If the price
elasticity of supply is greater then one then supply is elastic. If it is equal to one then it is unit
elastic.
Sale by Katy at $4 a dozen is of 50 dozens.
Prise rise to $6 a dozen and sales reduces to 40 dozens.
Price Elasticity of supply= Percentage change in the quantity supplied / percentage
change in price of the product
Percentage change in quantity supplied= [(50-40) / (50+40/ 2)]*100
= 22.22%
Percentage change in Price= [(6-4) / (6+4/ 2)]*100
= 40%
Price elasticity of supply= 0.55
(Source: Inelastic supply, 2016)
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Illustration 2: Inelastic Supply, 2016

From the above results it is concluded that price elasticity of supply is less then one
which reflects that supply of cookies by Katy is inelastic. Result of the case scenario says that
percentage change in the supply of goods is less then percentage change in price of the products
and this brings results in elasticity as less then one (Inelastic supply, 2016).
5) Tools for government intervention to deal with market failure
Market failure is a situation that generate because of inefficient allocation of resources in
a free market. There are variety of reasons for market failure such as monopoly (higher prices
and less output), negative externalities (over consumed), public goods (not provided in free
market) and when supply of goods is insufficient to meet demand. A market failure has a
negative effect on the economy due to the non-optimal allocation of resources. In this failure all
the allocated resources do not provide results that maximised the results. This leads to westage of
resources.
Using the definition of a broad perfect competition, a market failure can be usually be
corrected by allowing consumers and competing sellers to shove the market towards equilibrium
over a period of time. When this market failure is not controlled then government of the country
needs to make an intervention to deal with market failure. Their are following tools available for
government to correct market failure by making an intervention-
Taxation: When supply of goods in the market is not sufficient to meet quantity
demanded then it leads to market failure. Government by imposing taxes at minimal rate and
making simple taxation policies will help to resolve the issues. Works through the price
mechanism and easy policies will make it easy to understand.
Subsidy: It is the most commonly form of government intervention in the market to
reduce the negative effect of market failure. Increased supply and therefore reduced price, to
encourage production of goods that are short in the market will help to overcome this issue.
Government of the country grants subsidy to producers who plans to produce goods that are
short in market and helps in reduction of market failure.
State provision: When supply of goods in the nation is short and that leads to market
failure then government make intervention by directly provides goods that are funded through
tax revenues in order to provide goods which have positive externalities. This will gives each
individual a fair chance to get that product or service such as education or healthcare facilities.
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The problem of inequality in demand and supply will be resolved to some extend by this step of
government intervention.
Buffer Stocks: When supplies are insufficient to met market demand then government of
the country to resolve this market situation starts creating buffer stocks for the product. Goods
are offered to the general public that will help to bring the whole nation out from a situation of
market failure. Creating buffer system for short supply products will ensure fair income for
producers and fair price for consumers.
SECTION “B”
1) a. Supply schedule and the various factors affecting the supply in the market
Supply schedule is a chart that shows how much product a supplier will have to produce
to meet consumer demand at a specified price based on the supply curve. In other words it can be
said that it is basically a supply graph in spreadsheet that describes or mentioned quantity of
goods supplied in the market at various price level. This is one of the important concept for
business organisations as this schedule helps to understand what happens to the inventory and
sales when price of the products changes. There are two type of supply schedule such as-
Individual supply schedule: This refers to a tabular statement showing various
quantities of a commodity that a producer is willing to sell at various levels of price in a given
period of time.
Market supply schedule: This schedule refers to a tabular statement that represents
various quantities of a commodity that all the producers are willing to sell at various price levels,
during a given period of time. Market supply schedule is obtained by adding all the individual
supplies at each and every price level (Salvatore, 2015).
Factors affecting supply in the market:
 Price: This is one of the main factor that influences the supply of a product to the
greatest extent. There is a direct relationship between the price of a product and its supply
this means when price of a product increases then its supply also increases and vice versa.
 Cost of production: Supply of a commodity and cost of product possess a inverse
relationship. That means when cost of production increases then supply of product will
decrease. As the seller will wait for rise in the price of the product in future.
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 Natural conditions: Climatic conditions directly affects supply of certain products. Such
as supply of agricultural products are highly influence with weather condition.
 Technology: It is referred as one of the important determinant of supply. A better and
advanced technology increases the production of a product which results in the increase
in the supply of product.
 Transport condition: It refers to the fact that better transport facilities increases the
supply of products. Transport is always a constraint to the supply of products, as products
can not be made available across all the areas without better transport facilities.
b. Graph showing changes in the equilibrium price and quantity due to change in supply
Demand of a product will be considered perfectly inelastic when change in the price of
the product do not affects quantity demanded. This means the percentage change in quantity
demanded is zero no matter how price is changed (Salvatore, 2015). A product that possess
perfectly inelastic demand and its supply got doubled due to innovative technique of production
then it leads to change in the various figures as follows-
Interpretation: From the above graph it can be analysed when demand that demand line
of the product will remain constant. Increase in supply of the product will make availability of
the product in the market at large scale this will have a negative effect on the price of the
product. High supply of the product market leads to reduction in the price of the product.
Equilibrium price of a product is the market price at which amount of goods supplied become
equal to the amount of quantity demanded. Due to constant demand and increase in the supply
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price of the product will reduce from P to P1. This reduction in price has changed the
equilibrium price but quantity demanded remains constant. The product will achieve its new
equilibrium at E1. This shift in the equilibrium is because of excess supply of the product in the
market and no effect in the quantity demanded.
2) a. Characteristics of the emerging market form in the telecom industry
The Telecommunication Regulatory Authority(TRA) is the UAE's independent industry
regulator. Since 1976, Etisalat has hold a monopoly in the market and this changed because of
the emergence of du. UAE based telecom operator recently announced that it was launching
Virgin mobile as a new telecom brand within the country. From the above case scenario it is seen
that telecommunication market in UAE is in the form of monopoly in past years but now there is
continuous emergence of many business operators in the segment that makes this market form to
take form of Oligopoly market structure. This is formed with Greek words 'Olig' that means 'a
few' and 'poly' means 'seller'. In this market form there are only few sellers like Etisalat, du and
some new operators and they are producing homogeneous or a differentiated products.
Characteristics of Oligopoly market:
 Small number of large firms: Oligopoly market form is formed with few sellers and
each of the business organisation is relatively large compared to the overall size of the
market. This characteristic gives each of the relatively large firms sustainable market
control. Few firms available in UAE serves as competition for each firm produces as each
one contributes a defined proportion in the total output.
 Identical or differentiate products: Some oligopoly industries produces identical
products like perfect competition and some of therm produces differential products more
like monopoly. Identical product oligopoly tends to process raw material or produces
intermediate goods that are used in other industries. Differentiate oligopoly tends to focus
on the products used for personal consumption.
 Barriers to entry: Firms in the oligopoly industry retain market control through barriers
to control entry. Some of the barriers are exclusive resource ownership, patents and
copyrights, government restrictions and high start-up cost. With substantial entry barriers
found in oligopoly firms can not enter the industry as easily and thus existing firms
maintain greater market control.
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b. Pricing policy used in Oligopoly industry
Oligopoly is a market form that possess only few sellers and price plays very important
role in success of an business. The Kinked-Demand Theory is considered when an oligopoly
firm wants to change its price. When prices are changed by one organisation then other one have
option to change the price to ignore them. This decision of firm will be based on the direction in
which prices are changed. Rise in price can be ignored as it will allow them to take market share
from the price changer. If one firm lowers the price then other firm would surely follow this
trend to prevent any loss of market share (Trefor, 2015).
Cartel Model used in oligopoly try to form a cartel by agreeing to fix or to divide the
market among themselves or to restrict competition. Primary characteristic of this model is
collusion among the oligopolistic firms to fix prices or restrict competition so that higher profits
can be enjoyed. A dominant firm in an oligopoly can successfully collude to fix prices.
Price leadership model is used in the oligopoly when there is a dominant firm that
charges prices as per their policies. The dominant firm become the price leader and other firms in
the market changes price of the product when there is a substantial change in cost of the product.
c. Profit maximisation strategy
In UAE there are only few firms that are involved in telecommunication sector and
Etisalat an organisation which have enjoyed monopoly in that sector and now there is emergence
of various firms in past many years. When dominant firm in an oligopoly market successfully
collides with other to fix prices then they can be certain of each other's output and will allow to
maximise their profits. Cartel model of pricing must be used by firms in UAE to rule over
telecommunication sector. As this will provide profits by producing that quantity of output where
marginal revenue and marginal cost will be equal.
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CONCLUSION
From the above project report it has been concluded that economics plays important to
understand various market trends and gives bases of reaction. Managerial economics helps to
know about relation of demand, supply, equilibrium price and quantity. Together with this
perfect competition and its features are discussed, elasticity of demand and government
intervention in market failure is mentioned so that businesses can take effective actions. Supply
schedule and perfectly inelastic demand and reaction of supply in this is mentioned. Brief
analysis of telecommunication sector in UAE is mentioned in this project report.
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REFERENCES
Books and Journals
Bazerman, M. and Moore, D. A., 2013. Judgment in managerial decision making.
Ben-David, I., Graham, J. R. and Harvey, C. R., 2013. Managerial miscalibration. The Quarterly
Journal of Economics. 128(4). pp.1547-1584.
Beyer, M., Czarnitzki, D. and Kraft, K., 2012. Managerial ownership, entrenchment and
innovation. Economics of Innovation and New Technology. 21(7). pp.679-699.
Fort, R., 2015. Managerial objectives: a retrospective on utility maximization in pro team sports.
Scottish Journal of Political Economy. 62(1). pp.75-89.
Foxall, G. R., 2016. Operant behavioral economics. Managerial and Decision Economics. 37(4-
5). pp.215-223.
Graham, J. R., Harvey, C. R. and Puri, M., 2013. Managerial attitudes and corporate actions.
Journal of financial economics. 109(1). pp.103-121.
Paola, M. D. and Scoppa, V., 2012. The effects of managerial turnover: evidence from coach
dismissals in Italian soccer teams. Journal of Sports Economics. 13(2). pp.152-168.
Png, I., 2013. Managerial economics. Routledge.
Salvatore, D., 2012. Managerial Economics: Principles and Worldwide Application:(adapted
version). OUP Catalogue.
Salvatore, D., 2015. Managerial economics in a global economy. OUP Catalogue.
Trefor, J., 2015. Business economics and managerial decision making.
Online
Unitary elasticity. 2019. [Online]. Available through:
<http://www.economicsdiscussion.net/elasticity-of-demand/calculations/elasticity-of-
demand-meaning-and-types-with-calculations/12350>
Inelastic supply. 2016. [Online]. Available through:
<https://www.economicshelp.org/concepts/inelastic-supply/>
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