Managerial Economics Report: Market Structures and Pricing Strategies

This report delves into the principles of managerial economics, examining the interplay of demand, supply, and equilibrium in various market scenarios. It analyzes the impact of events such as changes in journalist salaries and news events on newspaper markets, and the effects of competition wins and raw material price fluctuations on the T-shirt market. The report explores different market structures, particularly perfect competition and oligopoly, detailing their characteristics, pricing policies, and profit maximization strategies. It includes computations of elasticity and discusses government interventions to address market failures. Furthermore, the report provides insights into the telecom industry's emerging market forms and analyzes factors influencing supply, alongside graphical representations of price and quantity changes. The report concludes with a discussion on the optimal point for a firm to stop hiring workers in a perfectly competitive market.

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