Law of Demand
The law of demand states that, if all other
factors remain equal, the higher the price of
a good, the less people will demand that
good. In other words, the higher the price,
the lower the quantity demanded. The
amount 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.
Elasticity of demand
Elasticity of demand is an important
variation on the concept of demand.
Demand can be classified as elastic, inelastic
or unitary.
An elastic demand is one in which the
change in quantity demanded due to a
change in price is large. An inelastic demand
is one in which the change in quantity
demanded due to a change in price is small.
Elasticity of demand is illustrated below.
Note that a change in price results in a large
change in quantity demanded. An example
of products with an elastic demand is
consumer durables. These are items that are
purchased infrequently, like a washing
machine or an automobile, and can be
postponed if price rises. For example,
automobile rebates have been very
successful in increasing automobile sales by
reducing price.
Close substitutes for a product affect the
elasticity of demand. If another product can
easily be substituted for your product,
consumers will quickly switch to the other
product if the price of your product rises or
the price of the other product declines. For
example, beef, pork and poultry are all meat
products. The declining price of poultry in
recent years has caused the consumption of
poultry to increase, at the expense of beef
and pork. So products with close substitutes
tend to have elastic demand.
Inelastic demand is illustrated below.

Note that a change in price results in only a
small change in quantity demanded. In other
words, the quantity demanded is not very
responsive to changes in price. Examples of
this are necessities like food and fuel.
Consumers will not reduce their food
purchases if food prices rise, although there
may be shifts in the types of food they
purchase. Also, consumers will not greatly
change their driving behavior if gasoline
prices rise. This does not mean that the
demand for an individual producer is
inelastic. For example, a rise in the price of
gasoline at all stations may not reduce
gasoline sales significantly. However, a rise
of an individual station’s price will
significantly affect that station’s sales.
Unitary Elasticity is illustrated below.
If the elasticity coefficient is equal to one,
demand is unitarily elastic as shown above.
For example, a 10% quantity change divided
by a 10% price change is one. This means
that a 1% change in quantity occurs for
every 1% change in price.
Utility and Demand
A consumer usually decides his demand for
a commodity on the basis of utility or
satisfaction that he derives from it. Utility of
a commodity is its want-satisfying capacity.
The more the need of a commodity or the
stronger the desire to have it, the greater is
the utility derived from the commodity.
Utility is also an economic measure of how
valuable, or useful, a good or service is to a
consumer. The key to the law of demand is
that the utility generated declines as the
quantity consumed increases. As such, the
demand price that buyers are willing to pay
decreases as the quantity demanded
increases. Those goods that generate more
utility are more valuable to consumers and
thus buyers are willing to pay a higher price.
Law of Diminishing Utility
This states that all else equal as consumption
increases the utility derived from each
additional unit declines. Diminishing utility
is derived as the change in utility as an
additional unit is consumed. Utility is an
economic term used to represent satisfaction
or happiness. This is the incremental
increase in utility that results from
consumption of one additional unit.
This means utility may decrease into
negative utility, as it may become entirely
unfavorable to consume another unit of any
product. Therefore, the first unit of
consumption for any product is typically
highest, with every unit of consumption to
follow holding less and less utility.
Consumers handle the law of diminishing
utility by consuming numerous quantities of
numerous goods.
Marginal Utility
Marginal utility is the change in total utility
due to consumption of one additional unit of
a commodity. For example, suppose 4
bananas give us 28 units of total utility and 5
bananas give us 30 units of total utility.
Clearly, consumption of the 5th banana has
caused total utility to increase by 2 units (30
units minus 28 units). Therefore, marginal
utility of the 5th banana is 2 units.
Usually, it is seen that the marginal utility
diminishes with increase in consumption of
the commodity. This happens because
having obtained some amount of the
commodity, the desire of the consumer to
have still more of it becomes weaker.
Supply
Willingness and ability to supply goods
determine the seller’s actions. At higher
prices, more of the commodity will be
available to the buyers. This is because the
suppliers will be able to maintain a profit
despite the higher costs of production that
may result from short-term expansion of
their capacity. In a real market, when the
inventory is less than the desired inventory,
manufacturers will raise both the supply of
their product and its price. The short-term
increase in supply causes manufacturing
costs to rise, leading to a further increase in
price. The price change in turn increases the
desired rate of production. A similar effect
occurs if inventory is too high. Classical
economic theory has approximated this
complicated process through the supply
curve. A supply curve shows slopes upward
because each additional unit is assumed to
be more difficult or expensive to make than
the previous one, and therefore requires a
higher price to justify its production.
The Law of Supply
Like the law of demand, the law of supply
demonstrates the quantities that will be sold
at a certain price. But unlike the law of
demand, the supply relationship shows an
upward slope. This means that the higher the
price, the higher the quantity supplied.
Producers supply more at a higher price
because selling a higher quantity at a higher
price increases revenue.
The Law of Supply and Demand
When supply and demand are equal (when
the supply function and demand function
intersect) the economy is said to be at
equilibrium. At this point, the allocation of
goods is at its most efficient because the
amount of goods being supplied is exactly
the same as the amount of goods being
demanded. Thus, everyone either
individuals, firms, or countries is satisfied
with the current economic condition. At the
given price, suppliers are selling all the
goods that they have produced and
consumers are getting all the goods that they
are demanding.
In the real market place equilibrium can
only ever be reached in theory, so the prices
of goods and services are constantly
changing in relation to fluctuations in
demand and supply.
Law of Diminishing Return
Law of diminishing returns explains that
when more and more units of a variable
input are employed on a given quantity of
fixed inputs, the total output may initially
increase at increasing rate and then at a
constant rate, but it will eventually increase
at diminishing rates. In other words, the total
output initially increases with an increase in
variable input at given quantity of fixed
inputs, but it starts decreasing after a point
of time.
A correct understanding of the law of
diminishing returns both as to its
application, economic law stating that if one
input in the production of a commodity is
increased while all other inputs are held
fixed, a point will eventually be reached at
which additions of the input yield
progressively smaller, or diminishing,
increases in output.
Marginal Revenue and Marginal Cost
The marginal cost of production measures
the change in the total cost of a good that
arises from producing one additional unit of
that good. The marginal cost is computed by
dividing the change in the total cost by the
change in quantity.
The marginal costs of production may
change as production capacity changes. If,
for example, increasing production from 200
to 201 units per day requires a small
business to purchase additional equipment,
then the marginal cost of production may be
very high. In contrast, this expense might be
significantly lower if the business is
considering an increase from 150 to 151
units using existing equipment.
A lower marginal cost of production means
that the business is operating with lower
fixed costs at a particular production
volume. If the marginal cost of production is
high, then the cost of increasing production
volume is also high and increasing
production may not be in the business's best
interests.
Marginal revenue increases whenever the
revenue received from producing one
additional unit of a good grows faster—or
shrinks more slowly—than its marginal cost
of production. Increasing marginal revenue
is a sign that the company is producing too
little relative to consumer demand, and that
there are profit opportunities if production
expands.
Physical and Economic Efficiency
Physical and Economic efficiency is related
to the value rather than the physical amounts
of all inputs used in producing a given
output. The production of a given output is
economically efficient if there are no other
ways of producing the output that use a
smaller total value of inputs. For example, a
firm may have several alternative production
methods that it could use. One may require a
lot of labor but only a little capital whereas
another requires a lot of capital and only a
little labor. A third production method may
require a lot of land but relatively little of
both labor and capital. In order to maximize
its profits, the firm should choose the
production method that costs the least.
Output
Efficiency=
Input
When physical units are involved, efficiency
is measured by;
Output ∈Physical Units
Physical Efficiency=
Input ∈Physical Units
This kind of efficiency can never exceed
100%. However, when money is the
material, effective utilization is measured
by;
Income ∈Pesos
Economic Efficiency=
Cost ∈Pesos
Unless the economic or financial efficiency
exceeds 100%. However, the investment of
capital, from a strictly financial viewpoint is
not recommended. A common measure of
financial efficiency is the so-called rate of
return given by the formula;
Annual Net Profit
Rate of Return=
Capital Invested
This is the most universally accepted
measure of financial effectiveness. Another
measure of economic efficiency is the
payout period;
Capital Invested
Payout Period=
Net Annual Cash Flow
This ratio determine the number of years
necessary to recover the amount of the
invested capital from the earnings of the
investment.
Compromise between Perfection
Economy
“Always aim for perfection” is a well-
known management principle. Frequently
used terms such as ‘zero defects’, ‘zero
inventories’, ‘First Time Right’
illustrations of this pursuit of perfection.
Achieving perfection has clear advantages,
but strangely enough also a number of
disadvantages. As the products and services
no longer have any defects in the perfect
world, the customer will – hopefully – want
to pay more for these products. In addition,
some costs will also decrease.
Achieving perfection is not easy and as you
approach perfection, it becomes increasingly
difficult to improve even further.
PRESENT ECONOMIC STUDIES:
Selection of Material
Involves selection among materials available
that will result in the most economical
product and give the best results.
Selection of Method
Two or more different methods may give the
same satisfactory results. Involves selection
of the most economical way to accomplish
operations.
and
Selection of Design
The design to be selected must be best suited
for the work to be done with particular care
being given to the one which will do the
are work with the utmost economy.
Site Selection
Costs relevant to selecting sites must be
carefully considered such as land cost,
construction cost, cost of available labor,
and cost of transporting equipment and
materials.
Comparison of Proficiency of Workers
Bear in mind that workers have varying
efficiency and proficiency. Worker
proficiency can be translated into monetary
values.
Economy of Tool and Equipment
Maintenance

Consider the costs of acquiring tools and

equipment and the costs of maintaining
them.

Economy in the Utilization of Personnel

Only a certain number of personnel will lead

to the highest productivity; increasing this
number will not cause a proportional
increase in productivity.