Consumer Behavior

-is the study of individuals, groups, or organizations and all the activities
associated with the purchase, use and disposal of goods and services, and how the
consumer's emotions, attitudes and preferences affect buying behavior.

4 Types of Consumer Behavior

A consumer’s buying decision depends on the type of products that they need to
buy. The behavior of a consumer while buying a coffee is a lot different while buying
a car.

Based on observations, it is clear that purchases that are more complex and
expensive involve higher deliberation and many more participants.

Consumer buying behavior is determined by the level of involvement that a

consumer shows towards a purchase decision. The amount of risk involved in a
purchase also determines the buying behavior. Higher priced goods tend to high
higher risk, thereby seeking higher involvement in buying decisions.

There are four type of consumer buying behavior:

1. Complex buying behavior

2. Dissonance-reducing buying behavior

3. Habitual buying behavior

4. Variety seeking behavior

1. Complex buying behavior

Complex buying behavior is encountered particularly when consumers are

buying an expensive product. In this infrequent transaction, consumers are
highly involved in the purchase decision. Consumers will research thoroughly
before committing to invest.

Consumer behaves very different when buying an expensive product or a product

that is unfamiliar to him. When the risk of buying a product is very high, a consumer
consults friends, family and experts before making the decision.

For example, when a consumer is buying a car for the first time, it’s a big decision as
it involves high economic risk. There is a lot of thought on how it looks, how his
friends and family will react, how will his social status change after buying the car,
and so on.
In complex buying behavior, the buyer will pass through a learning process. He will
first develop beliefs about the product, then attitudes, and then making a thoughtful
purchase choice.

For complex buying behavior customers, marketers should have a deep

understanding of the products. It is expected that they help the consumer to
understand about their product. It is important to create advertising message in a
way that influences the buyer’s beliefs and attitudes.

2. Dissonance-reducing buying behavior

In dissonance-reducing buying behavior consumer involvement is very high. This

might be due to high price and infrequent purchase. In addition, there is a low
availability of choices with less significance differences among brands. In this
type, a consumer buys a product that is easily available.

Consumers will be forced to buy goods that do not have too many choices and
therefore consumers will be left with limited decision making. Based on the products
available, time limitation or the budget limitation, consumers buy certain products
without a lot of research.

For example, a consumer who is looking for a new collapsible table that can be taken
for a camping, quickly decides on the product based on few brands available. The
main criteria here will be the use and the feature of the collapsible table and the
budget available with him.

Marketers should run after-sale service camps that deliver focused messaging.
These campaigns should aim to support consumers and convince them to continue
with their choice of their brand. These marketing campaigns should focus on
building repeat purchases and referrals by offering discounts and incentives.

3. Habitual buying behavior

Habitual Buying Behavior is depicted when a consumer has low involvement in

a purchase decision. In this case the consumer is perceiving only a few significant
differences between brands.

When consumers are buying products that they use for their daily routine, they do
not put a lot of thought. They either buy their favorite brand or the one that they use
regularly – or the one available in the store or the one that costs the least.

For example, while a consumer buys a loaf of bread, he tends to buy the brand that
he is familiar with without actually putting a lot of research and time. Many
products fit into this category. Everyday use products, such as salt, sugar, biscuits,
toilet paper, and black pepper all fit into this product category. Consumer just go for
it and buy it – there is no brand loyalty. Consumers do not research or need
information regarding purchase of such products.

Habitual buying behavior is influenced by radio, television and print media.

Moreover, consumers are buying based on brand familiarity. Hence marketers must
use repetitive advertisements to build brand familiarity. Further to initiate product
trial, marketers should use tactics like price drop promotions and sales
promotions.

Marketers should attract consumers using visual symbols and imagery in their
advertising. Consumers can easily remember visual advertisements and can associate
with a brand.

4. Variety seeking buying behavior

In variety seeking consumer behavior, consumer involvement is low. There are

significant differences between brands. Here consumers often do a lot of brand
switching. The cost of switching products is low, and hence consumers might
want to try out new products just out of curiosity or boredom. Consumers
here, generally buy different products not because of dissatisfaction but
mainly with an urge to seek variety.

For example, a consumer likes to buy a cookie and choose a brand without putting
much thought to it. Next time, the same consumer might may choose a different
brand out of a wish for a different taste. Brand switching occurs often and without
intention.

Brands have to adopt different strategies for such type of consumer behavior.
The market leader will persuade habitual buying behavior by influencing the shelf
space. The shelf will display a large number of related but different product versions.

Marketers avoid out-of-stock conditions, sponsor frequent advertising, offer lower

prices, discounts, deals, coupons and free samples to attract consumers.
 MODULE 2: DEFINING MANAGERIAL

Important Economic Terms and Concepts

While having a basic understanding of economic theory isn't perceived as being as

important as balancing a household budget or learning how to drive a car, the forces
that underpin the study of economics impact every moment of our lives. At the most
basic level, economics attempts to explain how and why we make the purchasing
choices we do.

Four key economic concepts—scarcity, supply and demand, costs and benefits, and
incentives—can help explain many decisions that humans make.

KEY TAKEAWAYS

 Four key economic concepts—scarcity, supply and demand, costs and

benefits, and incentives—can help explain many decisions that humans
make.

 Scarcity explains the basic economic problem that the world has limited—or
scarce— resources to meet seemingly unlimited wants, and this reality
forces people to make decisions about how to allocate resources in the
most efficient way.

 As a result of scarce resources, humans are constantly making choices that

are determined by their costs and benefits and the incentives offered by
different courses of action.

Scarcity

Everyone has an understanding of scarcity whether they are aware of it or not

because everyone has experienced the effects of scarcity. Scarcity explains the basic
economic problem that the world has limited—or scarce—resources to meet
seemingly unlimited wants. This reality forces people to make decisions about how
to allocate resources in the most efficient way possible so that as many needs as
possible are met.

For example, there is only so much wheat grown every year. Some people want
bread and some would prefer beer. Only so much of a given good can be made
because of the scarcity of wheat. How do we decide how much flour should be made
for bread and beer? One way to solve this problem is a market system driven by
supply and demand.
Supply and Demand

A market system is driven by supply and demand. Taking the example of beer, if
many people want to buy beer, the demand for beer is considered high. As a result,
you can charge more for beer and make more money on average by using wheat to
make beer than by using wheat to make flour.

Hypothetically, this could lead to a situation where more people start making beer
and, after a few production cycles, there is so much beer on the market—the supply
of beer increases—that the price of beer drops.

Although this is an extreme and overly simplified example, on a basic level, the
concept of supply and demand helps to explain why last year's popular product is
half the price the following year.

Volume 75%

5 Economic Concepts Consumers Need To Know

Costs and Benefits

The concept of costs and benefits is related to the rational expectations and rational
choices of consumers. In every situation, people try to maximize their benefits while
minimizing their costs.

If demand for beer is high, breweries will hire more employees to make more beer,
but only if the price of beer and the amount of beer they are selling justify the
additional costs of their salary and the materials needed to brew more beer.
Similarly, the consumer will buy the best beer they can afford to purchase, but not,
perhaps, the best-tasting beer in the store.

The concept of costs and benefits is applicable to other decisions that are not
related to financial transactions. University students perform cost-benefit analyses
on a daily basis by choosing to focus on certain courses that they've deemed more
important for their success. Sometimes this even means cutting the time they spend
studying for courses that they see as less necessary.

Although economics assumes that people are generally rational, many of the
decisions that humans make are actually very emotional and do not maximize our
own benefit. For example, the field of advertising preys on the tendency of humans
to act non-rationally. Commercials try to activate the emotional centers of our brain
and fool us into overestimating the benefits of a given item.

Everything Is in the Incentives

If you are a parent, a boss, a teacher, or anyone with the responsibility of oversight,
you've probably been in the situation of offering a reward—or incentive—in order to
increase the likelihood of a particular outcome.

Managerial Economics

Manager

– A person who directs resources to achieve a stated goal.

Economics

– The science of making decisions in the presence of scare resources.

Managerial Economics

– The study of how to direct scarce resources in the way that most efficiently
achieves a managerial goal.

Identify Goals and Constraints

Sound decision making involves having welldefined goals. – Leads to making the
“right”

decisions.

In striking to achieve a goal, we often face constraints. – Constraints are an artifact of

scarcity.

Economic vs. Accounting Profits

Accounting Profits

– Total revenue (sales) minus dollar cost of producing goods or services.

– Reported on the firm’s income statement. Economic Profits

– Total revenue minus total opportunity cost.

Opportunity Cost

Accounting Costs

– The explicit costs of the resources needed to produce goods or services.

– Reported on the firm’s income statement. Opportunity Cost

– The cost of the explicit and implicit

resources that are foregone when a decision is made.

Economic Profits

– Total revenue minus total opportunity cost.

Profits as a Signal

Profits signal to resource holders where resources are most highly valued by society.

– Resources will flow into industries that are

most highly valued by society.

Nature of Profits:

To understand the theory of the firm, it is necessary to know the nature of profits.

How do profits arise, what determines the volume of profits or stream of expected
future profits are important issues that require explanation in this regard.

Profits or expected profit stream from a productive activity or an investment play a

crucial role in decision making by managers.

Therefore, it is necessary to first explain the difference between business profits and
economic profits. Business profits are an accounting concept and represent the
residual sales revenue to the owners of the firm after making payments to all other
factors or resources the firm uses.

These payments to hired factors include the wages to hired labour, interest on
borrowed capital, rent on land and factory buildings and expenditure on raw
materials used by the firm. The expenditures on these factors or resources hired or
purchased by the firms are call explicit costs. Business profit refers to the sales
revenue of the firm minus its explicit costs. Thus

Business profits = Total sales revenue – Explicit costs

It is the concept of business profits that is generally used by the business community
and accountants.

In their calculation of economic profit, the economists deduct not only explicit costs
but also implicit costs from the sales revenue of the firm. The implicit costs refer to
the opportunity costs of the resources provided by the firm’s owners themselves
including capital and entrepreneurial ability.

These self-owned factors must be paid if they are too employed by the firm in its
own production process otherwise they will be employed elsewhere on hired basis.
Thus, economists take into account the normal rate of return on capital used by the
owner of the firm in its own business and the transfer earnings of the owner-
entrepreneur as costs of doing business.

The risk adjusted rate of return on capital is the minimum return that is necessary to
attract or retain it in business and is equal to what the owner could earn from
investing in other firms.

Similarly, the opportunity cost of the entrepreneurial effort made by the owner
entrepreneur is the salary that he could earn in his next best activity (say, as the
manager of another firm). Likewise, the opportunity costs of other self-owned
factors or inputs such as land, buildings used by the owner-entrepreneur in his own
business will be counted as implicit costs.

The economic profit represents the sales revenue of the firm in excess of both
explicit and implicit costs.

Economic profits = Sales revenue – Explicit costs – implicit costs.

While explaining maximisation of short-run profits or present value of the stream of

expected profits in the future, economists assume that it is economic profits that
owner- entrepreneur or managers of corporations seek to maximise. The concept of
economic profits brings into sharp focus the question why such profits which is over
and above the normal rate of return on equity capital and reward for entrepreneurial
ability in case of owner-entrepreneur, exists and what is its role in a free enterprise
system.

In long-run equilibrium economic profits will be zero if all firms work in perfectly
competitive market. Then, how does an economic profit, positive or negative, come
into existence.

Role and Importance of Profits:

Profits play an important role in a free market economy. Profits perform two
important primary roles in such an economy.

First, profits serve as a signal to change the rate of output or for the firms to enter or
leave the industry.

Second, profits play a critical role in providing incentive to introduce innovations and
increase productive efficiency and take risks.

Thus, high economic profits being earned in an industry serve as a signal that
consumers want more of the commodity being produced by that industry. These
profits indicate to the firm to expend output of the commodity and for the new firms
to enter the industry to gain a share of economic profits that exist in the industry. As
a result, more resources will be allocated to the output of that industry.

On the other hand, below normal profits in an industry serve as a signal that either
less output of the industry is demanded by the consumers or inefficient production
methods are being used by the firms. In response to the lower demand for the
product the firms will reduce their output and also some firms will leave the industry.

As a result, some productive resources will be released from that industry and made
available for the production of other goods. If the lower profits are due to the
inefficient production and organisation, this will induce firm to improve efficiency by
changing the production methods or make organisational changes to reduce costs.

Profit motive drives a free-market economy. Although it has been observed that
sometimes managers and entrepreneurs in a free market system are swayed by
greed and avarice, and break laws to make money or profits by exploiting the
consumers or workers but in general profits perform useful function of sending
signals for changing levels of output of various products and for reallocation of
resources among them.

MODULE 3: UNDERSTANDING

Market in Economics

A market is one of a composition of systems, institutions, procedures,

social relations or infrastructures whereby parties engage in exchange. While
parties may exchange goods and services by barter, most markets rely on sellers
offering their goods or services in exchange for money from buyers.

What Is the Definition of Incentives?

In the most general terms, an incentive is anything that motivates a person to do

something. When we’re talking about economics, the definition becomes a bit
narrower: Economic incentives are financial motivations for people to take certain
actions.

What Is the Difference Between Extrinsic vs. Intrinsic Incentives?

There are two types of incentives that affect human decision making: intrinsic and
extrinsic.
  Intrinsic incentives. Intrinsic incentives come from within. That is, a
person with an intrinsic motivation wants to do something for its own sake,
without an outside pressure or reward. Intrinsic incentive is that feeling of
personal fulfillment and satisfaction that people get from doing certain
things, like learning a new skill just for the fun of it.

 Extrinsic incentives. Extrinsic incentives involve providing a material reward

(like money) for accomplishing a task, or threatening some punishment for
failure to do so. By definition, all economic incentives are extrinsic
motivations.

5 Common Types of Economic Incentives

The most common type of economic incentive system is payroll: A paycheck

motivates people to show up to work and perform their duties. Yet there are
other types of economic incentive structures as well. Here are five common
examples.

1. Tax Incentives. Tax incentives—also called “tax benefits”—are reductions in

tax that the government makes in order to encourage spending on
certain items or activities. Tax incentives are often cited as a great way to
encourage economic development. For example, a common individual tax
exemption in the United States is the mortgage interest deduction, which
ensures money paid toward mortgage interest isn’t counted as taxable
income. This incentivizes people to buy property. An example of a
corporate tax incentive is a government giving a major company tax
breaks in exchange for them building an office or plant in their city. This
type of tax incentive stimulates the economy in that area by
empowering the company to provide jobs, as well as make goods or services
available for purchase.

2. Financial Incentives. A financial incentive is a broader term that

encompasses any monetary benefit given to a consumer, employer,
corporation, or organization in order to incentivize them to do something
they might not otherwise do. For employees, a financial incentive might
include stock options or commissions that encourage certain types of work
(think of salespeople, whose commission is considered a sales incentive).
For customers, an example of a financial incentive is a discount, like a
buy-one-get-one-free sale, which encourages more spending under the
guise of saving.

3. Subsidies. Subsidies are government incentive programs that provide set

amounts of money to businesses in order to help them grow. Agricultural
 subsidies are common in the United States, with the federal government
giving farmers billions of dollars both to farm more of certain products and
to reduce their outputs in times of surplus. Agricultural subsidies aren’t the
only type of U.S. government subsidy, of course. Others types of
government subsidies include: oil, ethanol, export, environmental, housing,
and health care.

4. Tax rebates. Tax rebates are incentives to take certain actions, like
investing in solar energy, for example. In the case of renewable energy tax
rebates, a state or local government offers a certain amount of money to
consumers to purchase more environmentally-friendly methods to generate
electricity. For instance, a city might offer any homeowner who pays to
install solar panels on their roof a check for $1,000.

5. Negative incentives. Negative economic incentives, or disincentives,

punish people

financially for taking certain actions. This is a way of encouraging specific

actions without making them compulsory. For example, the Affordable Care
Act was designed with a built- in negative economic incentive called the
“individual mandate,” which penalizes anyone who doesn’t buy health
insurance with a monetary fine at tax time.

Time value of money (TVM)

is the idea that money that is available at the present time is worth more than the
same amount in the future, due to its potential earning capacity. This core principle
of finance holds that provided money can earn interest, any amount of money is
worth more the sooner it is received. One of the most fundamental concepts in
finance is that money has a time value attached to it. In simpler terms, it
would be safe to say that a dollar was worth more yesterday than today and a dollar
today is worth more than a dollar tomorrow.

This chapter is a practical approach to the time value of money. We fully understand
that today's technology provides multiple calculators and applications to help you
derive both present value and future value of money. If you do not take the
time to comprehend how these calculations are derived, you may make critical
financial decisions using inaccurate data (because you may not be able to recognize
whether the answers are correct or incorrect). There are five (5) variables that you
need to know:

1. Present value (PV) - This is your current starting amount. It is the money
you have in your hand at the present time, your initial investment for your
future.
 2. Future value (FV) - This is your ending amount at a point in time in the
future. It should be worth more than the present value, provided it is
earning interest and growing over time.

3. The number of periods (N) - This is the timeline for your investment
(or debts). It is usually measured in years, but it could be any scale of time
such as quarterly, monthly, or even daily.

4. Interest rate (I) - This is the growth rate of your money over the lifetime of
the investment. It is stated in a percentage value, such as 8% or .08.

5. Payment amount (PMT) - These are a series of equal, evenly-spaced cash

flows.

What Is Marginal Analysis?

Marginal analysis is an examination of the additional benefits of an activity

compared to the additional costs incurred by that same activity. Companies use
marginal analysis as a decision- making tool to help them maximize their potential
profits. Marginal refers to the focus on the cost or benefit of the next unit or
individual, for example, the cost to produce one more widget or the profit earned by
adding one more worker.

KEY TAKEAWAYS

 Marginal analysis is an examination of the additional benefits of an activity

compared to the additional costs incurred by that same activity. Marginal
refers to the focus on the cost or benefit of the next unit or individual, for
example, the cost to produce one more widget or the profit earned by adding
one more worker.
 Companies use marginal analysis as a decision-making tool to help
them maximize their potential profits.
 When a manufacturer wishes to expand its operations, either by adding new
product lines or increasing the volume of goods produced from the current
product line, a marginal analysis of the costs and benefits is necessary.

Marginal Analysis Understanding Marginal Analysis

Marginal analysis is also widely used in microeconomics when analyzing how a

complex system is

affected by marginal manipulation of its comprising variables. In this sense,

marginal analysis focuses on examining the results of small changes as the effects
cascade across the business as a whole.
Marginal analysis is an examination of the associated costs and potential
benefits of specific business activities or financial decisions. The goal is to
determine if the costs associated with the change in activity will result in a benefit
that is sufficient enough to offset them. Instead of focusing on business output as a
whole, the impact on the cost of producing an individual unit is most often observed
as a point of comparison.

Marginal analysis can also help in the decision-making process when two
potential investments exist, but there are only enough available funds for one.
By analyzing the associated costs and estimated benefits, it can be determined if
one option will result in higher profits than another.

Marginal Analysis and Observed Change

From a microeconomic standpoint, marginal analysis can also relate to observing

the effects of small changes within the standard operating procedure or total
outputs. For example, a business may attempt to increase output by 1% and
analyze the positive and negative effects that occur because of the change, such
as changes in overall product quality or how the change impacts the use of
resources. If the results of the change are positive, the business may choose to raise
production by 1% again and reexamine the results. These small shifts and the
associated changes can help a production facility determine an optimal production
rate.

Marginal Analysis and Opportunity Cost

Managers should also understand the concept of opportunity cost. Suppose a

manager knows that there is room in the budget to hire an additional worker.
Marginal analysis tells the manager that an additional factory worker provides net
marginal benefit. This does not necessarily make the hire the right decision.

Suppose the manager also knows that hiring an additional salesperson yields an
even larger net marginal benefit. In this case, hiring a factory worker is the
wrong decision because it is sub- optimal.
 MODULE 4: CLASSIFICATION OF BANKING CORPORATIONS AND THE ROLE OF
BANKS ON ECONOMIC GROWTH

Classification of Banks

What's the difference? A guide to Philippine bank charters

There are six types of available bank charters in the Philippines:

 Universal Banks
 Commercial Banks
 Thrift Banks
 Rural Banks
 Cooperative Banks
 Islamic Banks

Rural Banks and Cooperative Banks have the same powers and may:

 Extend loans to farmers, fishermen, cooperatives, and certain other persons

and merchants.
 Take savings and time deposits.
 Take current/ checking accounts, if the bank has net assets of PHP5 million
or more.
 Offer NOW (negotiable order of withdrawal) accounts.
 Acts as a trustee over the estates of farmers and merchants.
 Take municipal, city or provincial deposits from the municipality, city or
province where the bank is located.

Thrift Banks have all the powers enumerated above, and in addition may:

 Grant all secured and unsecured loans

 Invest in bonds, commercial paper, and other fixed income securities.
 Issue domestics letters of credit
 Extend credit facilities to private and government employees.
 Rediscount paper with the Land Bank of the Philippines (LBP),
Development Bank of the Philippines (DBP), and other government owned
or controlled corporations.
 Accepts foreign currency deposits.
 Purchase, hold and convey real estate.
Commercial Banks may, in addition to the above:

 Buy and sell foreign exchange and billion.

 Receive in custody funds, documents and valuable objects.
 Act as a broker or agent to buy and sell securities for customers.
 Acts as an advisor or administrator of investment management accounts
 Rent out safety deposit boxes.
 Engage in quasi-banking functions.

Universal Banks are the most powerful and can also:

 Exercise all the legal powers of an investment house, including underwriting.

 Invest in non-allied enterprises.
 Own up to 100% of the equity of a Thrift Bank, Rural Bank, or Allied
enterprise.
 Own up to 100% of the voting stock of -one- other Universal or Commercial
Bank (if publicly listed)

Role of Banks in the Economy

Banks play an important role in the financial system and the economy. As a key
component of the financial system, banks allocate funds from savers to borrowers
in an efficient manner. They provide specialized financial services, which reduce
the cost of obtaining information about both savings and borrowing opportunities.
These financial services help to make the overall economy more efficient.

Imagine a World Without Banks

One way to answer your question is to imagine, for a moment, a world without
banking institutions, and then to ask yourself a few questions. This is not just an
academic exercise; many former eastern-block nations began facing this question
when they began to create financial markets and develop market-oriented banks and
other financial institutions.

If there were no banks…

 Where would you go to borrow money?

 What would you do with your savings?
 Would you be able to bowwow (save) as much as you need, when you need
it, in a form that would be convenient for you?
 What risks might you face as a saver (borrower)?
How Banks Work

Banks operate by borrowing funds-usually by accepting deposits or by

borrowing in the money markets. Banks borrow from individuals, businesses,
financial institutions, and governments with surplus funds (savings). They then use
those deposits and borrowed funds (liabilities of the bank) to make loans or to
purchase securities (assets of the bank). Banks make these loans to businesses,
other financial institutions, individuals, and governments (that need the funds
for investments or other purposes). Interest rates provide the price signals for
borrowers, lenders, and banks.

MODULE 5: BASIC DEMAND AND SUPPLY CONCEPTS

Law of Demand vs. Law of Supply

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 goods 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.

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. From the seller's perspective, the opportunity cost of each additional unit
that they sell tends to be higher and higher. Producers supply more at a higher price
because the higher selling price justifies the higher opportunity cost of each
additional unit sold.

For both supply and demand, it is important to understand that time is always a
dimension on these charts. The quantity demanded or supplied, found along the
horizontal axis, is always measured in units of the good over a given time interval.
Longer or shorter time intervals can influence the shapes of both the supply and
demand curves.

At any given point in time, the supply of a good brought to market is fixed. In other
words the supply curve in this case is a vertical line, while the demand curve is
always downward sloping due to the law of diminishing marginal utility. Sellers can
charge no more than the market will bear based on consumer demand at that point
in time. Over longer intervals of time however, suppliers can increase or decrease the
quantity they supply to the market based on the price they expect to be able to
charge. So over time the supply curve slopes upward; the more suppliers expect to
be able to charge, the more they will be willing to produce and bring to market.

The four basic laws of supply and demand are:

1. If demand increases and supply remains unchanged, then it leads to higher

equilibrium price and higher quantity.

2. If demand decreases and supply remains unchanged, then it leads to lower

equilibrium price and lower quantity.

3. If supply increases and demand remains unchanged, then it leads to lower

equilibrium price and higher quantity.

4. If supply decreases and demand remains unchanged, then it leads to higher

equilibrium price and lower quantity.
 MODULE 6: DEMAND/SUPPLY SHIFTERS

6 Supply Shifters

 Prices of Factors of Production

A change in the price of labor or some other factor of production will change the cost
of producing any given quantity of the good or service. This change in the cost of
production will change the quantity that suppliers are willing to offer at any price. An
increase in factor prices should decrease the quantity suppliers will offer at any price,
shifting the supply curve to the left. A reduction in factor prices increases the
quantity suppliers will offer at any price, shifting the supply curve to the right.

Suppose coffee growers must pay a higher wage to the workers they hire to harvest
coffee or must pay more for fertilizer. Such increases in production cost will cause
them to produce a smaller quantity at each price, shifting the supply curve for coffee
to the left. A reduction in any of these costs increases supply, shifting the supply
curve to the right.

 Returns from Alternative Activities

To produce one good or service means forgoing the production of another. The
concept of opportunity cost in economics suggests that the value of the activity
forgone is the opportunity cost of the activity chosen; this cost should affect supply.
For example, one opportunity cost of producing eggs is not selling chickens. An
increase in the price people are willing to pay for fresh chicken would make it more
profitable to sell chickens and would thus increase the opportunity cost of producing
eggs. It would shift the supply curve for eggs to the left, reflecting a decrease in
supply.

 Technology
A change in technology alters the combinations of inputs or the types of inputs
required in the production process. An improvement in technology usually means
that fewer and/or less costly inputs are needed. If the cost of production is lower, the
profits available at a given price will increase, and producers will produce more. With
more produced at every price, the supply curve will shift to the right, meaning an
increase in supply.

Impressive technological changes have occurred in the computer industry in recent

years. Computers are much smaller and are far more powerful than they were only a
few years ago—and they are much cheaper to produce. The result has been a huge
increase in the supply of computers, shifting the supply curve to the right.

While we usually think of technology as enhancing production, declines in

production due to problems in technology are also possible. Outlawing the use of
certain equipment without pollution- control devices has increased the cost of
production for many goods and services, thereby reducing profits available at any
price and shifting these supply curves to the left.

 Seller Expectations

All supply curves are based in part on seller expectations about future market
conditions. Many decisions about production and selling are typically made long
before a product is ready for sale. Those decisions necessarily depend on
expectations. Changes in seller expectations can have important effects on price and
quantity.

Consider, for example, the owners of oil deposits. Oil pumped out of the ground and
used today will be unavailable in the future. If a change in the international political
climate leads many owners to expect that oil prices will rise in the future, they may
decide to leave their oil in the ground, planning to sell it later when the price is
higher. Thus, there will be a decrease in supply; the supply curve for oil will shift to
the left.

 Natural Events

Storms, insect infestations, and drought affect agricultural production and thus the
supply of agricultural goods. If something destroys a substantial part of an
agricultural crop, the supply curve will shift to the left. The terrible cyclone that killed
more than 50,000 people in Myanmar in 2008 also destroyed some of the country’s
prime rice growing land. That shifted the supply curve for rice to the left. If there is
an unusually good harvest, the supply curve will shift to the right.

 The Number of Sellers

The supply curve for an industry, such as coffee, includes all the sellers in the
industry. A change in the number of sellers in an industry changes the quantity
available at each price and thus changes supply. An increase in the number of sellers
supplying a good or service shifts the supply curve to the right; a reduction in the
number of sellers shifts the supply curve to the left.

The market for cellular phone service has been affected by an increase in the number
of firms offering the service. Over the past decade, new cellular phone companies
emerged, shifting the supply curve for cellular phone service to the right.

6 Demand Shifters

1. Tastes and Preferences of the Consumers:

An important factor which determines the demand for a good is the tastes and
preferences of the consumers for it. A good for which consumers’ tastes and
preferences are greater, its demand would be large and its demand curve will
therefore lie at a higher level. People’s tastes and preferences for various goods often
change and as a result there is change in demand for them.

The changes in demand for various goods occur due to the changes in fashion and
also due to the pressure of advertisements by the manufacturers and sellers of
different products. On the contrary, when certain goods go out of fashion or people’s
tastes and preferences no longer remain favourable to them, the demand for them
decreases.

2. Income of the People:

The demand for goods also depends upon the incomes of the people. The greater
the incomes of the people, the greater will be their demand for goods. In drawing
the demand schedule or the demand curve for a good we take income of the people
as given and constant. When as a result of the rise in the income of the people, the
demand increases, the whole of the demand curve shifts upward and vice versa.

The greater income means the greater purchasing power. Therefore, when incomes
of the people increase, they can afford to buy more. It is because of this reason that
increase in income has a positive effect on the demand for a good.

When the incomes of the people fall, they would demand less of a good and as a
result the demand curve will shift downward. For instance, as a result of economic
growth in India the incomes of the people have greatly increased owing to the large
investment expenditure on the development schemes by the Government and the
private sector.
As a result of this increase in incomes, the demand for good grains and other
consumer goods has greatly increased. Likewise, when because of drought in a year
the agriculture production greatly falls, the incomes of the farmers decline. As a
result of the decline in incomes of the farmers, they will demand less of the cotton
cloth and other manufactured products.

3. Changes in Prices of the Related Goods:

The demand for a good is also affected by the prices of other goods, especially those
which are related to it as substitutes or complements. When we draw the demand
schedule or the demand curve for a good we take the prices of the related goods as
remaining constant.

Therefore, when the prices of the related goods, substitutes or complements,

change, the whole demand curve would change its position; it will shift upward or
downward as the case may be. When the price of a substitute for a good falls, the
demand for that good will decline and when the price of the substitute rises, the
demand for that good will increase.

For example, when price of tea and incomes of the people remain the same but the
price of coffee falls, the consumers would demand less of tea than before. Tea and
coffee are very close substitutes. Therefore, when coffee becomes cheaper, the
consumers substitute coffee for tea and as a result the demand for tea declines. The
goods which are complementary with each other, the fall in the price of any of them
would favorably affect the demand for the other.

For instance, if price of milk falls, the demand for sugar would also be favorably
affected. When people would take more milk, the demand for sugar will also
increase. Likewise, when the price of cars falls, the quantity demanded of them
would increase which in turn will increase the demand for petrol.

4. Advertisement Expenditure:

Advertisement expenditure made by a firm to promote the sales of its product is an

important factor determining demand for a product, especially of the product of the
firm which gives advertisements. The purpose of advertisement is to influence the
consumers in favour of a product. Advertisements are given in various media such as
newspapers, radio, and television. Advertisements for goods are repeated several
times so that consumers are convinced about their superior quality. When
advertisements prove successful they cause an increase in the demand for the
product.

5. The Number of Consumers in the Market:

The market demand for a good is obtained by adding up the individual demands of
the present as well as prospective consumers of a good at various possible prices.
The greater the number of consumers of a good, the greater the market demand for
it. Now, the question arises on what factors the number of consumers for a good
depends. If the consumers substitute one good for another, then the number of
consumers for the good which has been substituted by the other will decline and for
the good which has been used in place of the others, the number of consumers will
increase.

Besides, when the seller of a good succeeds in finding out new markets for his good
and as a result the market for his good expands the number of consumers for that
good will increase. Another important cause for the increase in the number of
consumers is the growth in population. For instance, in India the demand for many
essential goods, especially food grains, has increased because of the increase in the
population of the country and the resultant increase in the number of consumers for
them.

6. Consumers’ Expectations with Regard to Future Prices:

Another factor which influences the demand for goods is consumers’ expectations
with regard to future prices of the goods. If due to some reason, consumers expect
that in the near future prices of the goods would rise, then in the present they would
demand greater quantities of the goods so that in the future they should not have to
pay higher prices. Similarly, when the consumers expect that in the future the prices
of goods will fall, then in the present they will postpone a part of the consumption of
goods with the result that their present demand for goods will decrease.

MODULE 8: DEMAND AND SUPPLY FUNCTIONS

Supply and demand are both very important to economic activity. Supply is the total
amount of a particular good or service available at a given time to consumers.
Demand is a representation of a consumer's desire to purchase goods and services; it
acts as a measurement of a consumer's willingness to pay a price for a specific good
or service. These two economic forces influence each other; they are both important
for the economy because they impact the prices of consumer goods and services
within an economy.

Supply and Demand Determine the Price of Goods

Consumers may exhaust the available supply of a good by purchasing a given good or
service at a high volume. This leads to an increase in demand. As demand increases,
the available supply also decreases. While an increased supply may satiate available
demand at a set price, prices may fall if supply continues to grow. But if supply
decreases, prices may increase. Supply and demand have an important relationship
because together they determine the prices of most goods and services.

 Supply and demand are both important for the economy because they impact
the prices of consumer goods and services within an economy.
 According to market economy theory, the relationship between supply and
demand balances out at a point in the future; this point is called the
equilibrium price.
 Economists and companies analyze the relationship between supply and
demand when making strategic product decisions.
According to the principles of a market economy, the relationship between supply
and demand balances out at a point in the future. This point–at which supply is equal
to demand–is called

the equilibrium price. At the equilibrium point, the market price for a given good
ensures that the quantity of goods supplied is equal to the number of goods
demanded. At this point, prices are

perfectly set to interest consumers to purchase goods; at the same time, ensuring
that companies produce neither too much nor too little product. Both economists
and companies analyze the relationship between supply and demand when making
strategic product decisions. The assumption behind a market economy is that supply
and demand are the best determinants for an economy's growth and health.

MODULE 9: MARKET EQUILIBRIUM

What Is Equilibrium?

Equilibrium is the state in which market supply and demand balance each other, and
as a result prices become stable. Generally, an over-supply of goods or services
causes prices to go down, which results in higher demand while an under-supply or
shortage causes prices to go up resulting in less demand. The balancing effect of
supply and demand results in a state of equilibrium.

Understanding Equilibrium

The equilibrium price is where the supply of goods matches demand. When a major
index experiences a period of consolidation or sideways momentum, it can be said
that the forces of supply and demand are relatively equal and the market is in a state
of equilibrium.
Equilibrium vs. Disequilibrium

When markets aren't in a state of equilibrium, they are said to be in disequilibrium.

Disequilibrium can happen in a flash in a more stable market or can be a systematic
characteristic of certain markets.

Partial Equilibrium

(a) Microeconomics uses partial equilibrium analysis based on the assumption,

other things remaining constant.

(b) Partial equilibrium studies the equilibrium of a consumer, a firm, an industry

or a market.

(c) It deals with one or two variables at a time. So it is a simple method. It is

independent.

(d) Partial Equilibrium is regarded as a worm's eye-view.