JAGANNATH UNIVERSITY

Department of Marketing

An Assignment on
Economics of Business & Demand-Supply
Course Name: Managerial Economics
Course Code: MKT-6202

Assigned by
Dr. Md. Farijul Islam
Associate Professor
Department of Marketing, Faculty of Business Studies
Jagannath University, Dhaka.

Submitted By
Md. Golam Kibria ID : M23030204145
Md. Abdullah Al Hossain ID : M23030204147
Md. Rafiur Rahman ID : M23030204148
Uchyas Roy ID : M23030204149
Md. Sohel Rana ID : M23030204150
Date of Submission: 3rd November, 2023
Letter of Transmittal

Dr. Md. Farijul Islam

Associate Professor

Department of Marketing, Faculty of Business Studies

Jagannath University, Dhaka.

Subject: Submission of assignment on “Economics of Business & Demand-Supply”

Dear Sir,

With due respect, We, the undersigned students of MBA 3rd (B) batch have reported on
“Economics of Business & Demand-Supply” under the course: Managerial Economics, MKT-
6202. The assignment has been completed by the knowledge that we have gathered from the
course “: Managerial Economics”

We are thankful to all those persons who provided us important information and gave us
valuable advices. We would be happy if you read the report carefully and we will be trying to
answer all the questions that you have about the assignment.

We have tried our level best to complete this assignment meaningfully and correctly, as much as
possible. We do believe that our tiresome effort will help you to get ahead with this sort of
venture. In this case it will be meaningful to us. However, if you need any assistance in
interpreting this assignment, please contact us without any kind of hesitation.

Thanking you.

Yours obediently

Md. Golam Kibria ID : M23030204145

Md. Abdullah Al Hossain ID : M23030204147

Md. Rafiur Rahman ID : M23030204148

Uchyas Roy ID : M23030204149

Md. Sohel Rana ID : M23030204150

Executive Summary

We are a young team to raise a business. We are designed with highly corporate and well
designated entity to serve products to our customer. We spent a bulk amount of money on
promotion, as this investment will come with profit because the major growth is our priority. Our
mission is to provide tea enthusiasts with an unparalleled experience by offering products. Our
vision is to make a positive impact on the lives of tea lovers and the communities it serves. We
use our competitors as our potential cultivators. In our methodology, we systematically solve the
research problem. We draw the Demand and supply equilibrium is a fundamental concept in
economics that represents the point at which the quantity of a good or service that consumers are
willing and able to buy (demand) equals the quantity that producers are willing and able to sell
(supply). This equilibrium is crucial in determining the market price and quantity of goods
exchanged in a free market economy.
 Index
No Topic Pages
01. Introduction of Economics of Business 01
02. i. i) Allocation of Resources 01
03. ii. Pricing Stratagies 01
04. iii. Market Analysis 01
05. iv. Cost Analysis 01
06. v. Revenue Maximization 02
07. Important terms and Concepts 02
08. i. Supply & Demand 03
09. ii. Price Elasticity 03
10. iii. Marginal Cost 03
11. iv. Comparative Advantage 03
12. v. Monopoly & Oligopoly 03
13. Definition of Firm 04
14. Seven (7) Main Objectives of Business Firm 04
15. Demand Schedule 05
16. Demand-Supply Equilibrium 07
17. Chart & Graphical Representation 07
18. Demand Curve 08
19. Supply Curve 09
20. Equilibrium Point 10
21. Managerial Economics 11
22. Two main purposes of Managerial Economics 12
23. Supply Demand Relationship 13
24. Production Theory 14
25. Opportunity Cost 15
26. Maximum Price Ceiling 19
27. Trade Policy 21
28. No Trade and With Trade 22
29. With Free Trade and Tarriff 23
30. Elasticity 26
31. Reference 27
Introduction of Economics of Business
The economics of business, also known as managerial economics, is a subfield of economics that
focuses on applying economic principles and analysis to business decision-making. It is
concerned with understanding and addressing the economic challenges and opportunities faced
by firms and organizations in their pursuit of profitability, efficiency, and sustainability. This
field provides valuable insights to business managers and leaders as they navigate the
complexities of the modern marketplace.

Key aspects of the economics of business include:

1. Allocation of Resources: Businesses must make decisions about how to allocate their limited
resources, such as capital, labor, and technology, to maximize output and minimize costs.
Managerial economics helps firms make optimal resource allocation decisions by considering
factors like opportunity cost, production efficiency, and resource constraints.

2. Pricing Strategies: Determining the right price for products or services is a critical decision
for businesses. Managerial economics helps in analyzing price elasticity, demand-supply
dynamics, and market conditions to set prices that maximize revenue and profit while remaining
competitive.

3. Market Analysis: Understanding the industry and market in which a business operates is
essential. This includes analyzing market structure, identifying potential competitors, and
evaluating market trends to make informed strategic decisions.

4. Cost Analysis: Businesses need to manage costs effectively to remain competitive.

Managerial economics assists in analyzing and optimizing various cost components, including
production costs, labor costs, and overhead expenses.

5. Revenue Maximization: Businesses aim to maximize their revenues while considering

factors like demand, pricing, and production capacity. Managerial economics provides tools and
techniques for optimizing revenue streams.

 Economics of business refers to the study of economic principles and theories as they
apply to businesses and their operations. It aims to understand and analyze how
businesses make decisions and operate within the larger economic environment.

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  The study of economics of business involves examining factors such as supply and
demand, production and costs, market structures, competition, pricing strategies, and
regulatory frameworks. It seeks to explain how businesses allocate scarce resources to
meet the needs and wants of consumers while maximizing profits and minimizing costs.

 Economics of business also looks at factors such as market trends, consumer behavior,
and government policies that can impact business decisions. For example, an
understanding of economic theory can help businesses anticipate and adapt to changes in
the business environment, such as shifts in consumer preferences, technological
advancements, or changes in government regulations.

 By studying economics of business, individuals can gain insights into the decision-
making processes of businesses, the factors that influence their performance and strategy,
and the implications of economic policies on business operations. This knowledge can be
valuable for individuals working in various roles within businesses, such as managers,
entrepreneurs, consultants, or analysts. It can also be useful for policymakers and
economists who seek to understand the dynamics of the business sector and design
effective economic policies.

 Overall, economics of business provides a framework for understanding the economic

forces that shape businesses and the impact of businesses on the broader economy. It
helps individuals and organizations make informed decisions based on the analysis of
economic data, theories, and models, ultimately contributing to the growth and
development of the business sector.

Important terms & Concepts of Economics of Business

 1. Supply and Demand: The fundamental concept that describes the relationship
between the quantity of a product or service that producers are willing to supply and the
quantity that consumers are willing to purchase at a given price.

 2. Market equilibrium: The point at which the quantity of a product or service

demanded by consumers is equal to the quantity supplied by producers, resulting in a
stable price.

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 3. Price elasticity of demand: A measure of how sensitive the quantity demanded of a
product is to changes in its price. It helps businesses determine how much a change in
price will affect their revenue.

 4. Marginal cost: The additional cost to produce one more unit of a product. It helps
businesses determine the profit-maximizing quantity to produce.

 5. Opportunity cost: The cost of forgoing the next best alternative when making a
decision. It helps businesses make rational decisions by assessing the benefits and costs
of different choices.

 6.Comparative advantage: The ability of a country, individual, or business to produce a

good or service at a lower opportunity cost than others. It is the basis for international
trade.

 . 7. Monopoly: A market structure in which a single firm dominates the entire market,
giving it significant market power and the ability to set prices.

 8. Oligopoly: A market structure in which a few large firms dominate the market, leading
to interdependence and strategic behavior such as price-fixing or collusion.

 9. Gross Domestic Product (GDP): The total value of all goods and services produced
within a country's borders in a given period. It is a measure of economic output and
growth.

 10. Inflation: A sustained increase in the general level of prices for goods and services in
an economy over time. It erodes the purchasing power of money and affects businesses'
costs and profitability.

 11. Fiscal policy: The use of government spending and taxation to influence the overall
level of economic activity. It includes measures such as government expenditure,
taxation, and public debt.

 12. Monetary policy: The management of the money supply and interest rates by central
banks to control inflation, stabilize prices, and promote economic growth. It includes
actions such as adjusting interest rates and regulating the banking system.

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  13. Externalities: The costs or benefits that are not directly accounted for in the market
transaction but affect individuals or society. For example, pollution from production
processes or the positive effects of education on productivity.

 14. Human capital: The skills, knowledge, and experience possessed by individuals that
enable them to be productive in the economy. It is an essential factor in driving economic
growth and development.

 15. Market failure: A situation in which the market fails to allocate resources
efficiently, usually due to externalities, imperfect information, or market power.
Government intervention may be necessary to correct market failures.

Definition of Firm:

A firm is a business organization such as a corporation that produces and sells goods and
services with the aim of generating revenue and making a profit.

For example, one of the most common uses of this term is for 'law firms,' which usually sell
services in relation to the law.

Seven (7) Main Objectives of a Business Firm:

The following points highlight the seven main objectives of a business firm. The objectives are:

1. Profit Maximization

2. Increasing Market Share

3. Enhancing customer satisfaction

4. Continual growth and expansion

5. Improving operational efficiency

6. Building a strong brand reputation

7. Social responsibility

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Profit maximization: One of the primary objectives of a business firm is to maximize its
profitability. This involves generating revenue that exceeds the costs of production and
operation.

Increasing market share: Many businesses strive to capture a larger market share by expanding
their customer base and winning over competitors' customers. This objective is commonly
pursued through effective marketing strategies and product development.

Enhancing customer satisfaction: Businesses aim to provide products or services that meet or
exceed customer expectations. By delivering high-quality products, excellent customer service,
and addressing customer needs, businesses can build and maintain a loyal customer base.

Continual growth and expansion: Businesses often set goals for growth in terms of revenue,
market reach, or expansion into new markets. Growth can be achieved through various means,
such as acquiring other businesses, developing new products, or entering new geographic
markets.

Improving operational efficiency: Efficiency in operations is crucial for businesses to reduce

costs, increase productivity, and improve profitability. This objective involves streamlining
processes, optimizing resources, and implementing efficient technologies.

Building a strong brand reputation: Developing and maintaining a positive brand image is
essential for the success of a business. Businesses aim to establish a good reputation for quality,
reliability, and customer satisfaction to differentiate themselves from competitors.

Social responsibility: Many businesses recognize the importance of being socially responsible
and aim to contribute to the well-being of society. This objective includes activities such as
environmental sustainability, ethical business practices, and corporate social responsibility
initiatives.

Maximizing wealth and economic profits in economics is a complex undertaking that involves
various strategies and considerations. Here are some key factors to consider in this pursuit:

Efficient allocation of resources: Wealth maximization requires efficient allocation of scarce

resources. This can be achieved through market mechanisms such as competition, free trade, and
price signals.

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Cost minimization: To maximize profits, it is crucial to minimize costs of production. Firms
should aim to optimize their production processes, reduce waste, and make cost-effective
decisions in areas such as sourcing, labor, and capital investments.

Revenue maximization: Businesses need to focus on generating maximum revenue from their
products or services. This involves adopting effective pricing strategies, expanding market reach,
enhancing product differentiation, and improving customer satisfaction.

Technology and innovation: Embracing technological advancements and fostering innovation

can lead to increased productivity and competitive advantage. Businesses should continually
invest in research and development, adopt new technologies, and improve their operations to
maximize wealth and profits.

Market demand and customer needs: Understanding and meeting customer needs is essential.
Successful businesses align their products or services with market demand, conduct market
research, and adapt to changing consumer preferences. This ensures sustained demand and
revenue growth.

Effective marketing and branding: Developing strong marketing and branding strategies helps
businesses differentiate themselves from competitors, build customer loyalty, and increase
market share. Effective promotion and visibility lead to higher sales and profits.

Risk management: Managing risks and uncertainty is crucial to wealth maximization.

Businesses should conduct thorough risk assessments, implement risk mitigation strategies, and
make informed decisions based on market conditions, competitive analysis, and changing
economic factors.

Human capital development: Investing in human capital through training, education, and skills
development is vital to drive productivity and enhance profitability. Empowering employees,
improving their efficiency, and fostering a positive work culture contribute to overall wealth
maximization.

Government policies and regulations: Economic policies and regulations play a significant
role in creating an environment conducive to wealth creation. Governments should focus on

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promoting competition, enforcing property rights, protecting intellectual property, and creating
stable macroeconomic conditions that encourage investment and growth.

Sustainability and social responsibility: Long-term wealth maximization involves

incorporating sustainability practices and embracing corporate social responsibility. Businesses
need to consider the environmental and social impacts of their operations, contribute positively
to communities, and maintain ethical practices to ensure sustainable profitability.

Creating a demand curve involves plotting the quantity of a good or service demanded at various
price points. Here's a simplified example of a demand curve for a hypothetical product, let's call
it "Product X.

Demand Schedule for Product X:

Price (BDT) Quantity Demaned

10 100
20 80
30 60
40 40
50 20
60 0

Now, let's create a graphical representation of the demand curve based on this demand schedule:

In the graph, the horizontal axis represents the price of Product X in dollars, while the vertical
axis represents the quantity demanded. As the price increases, you can see that the quantity
demanded decreases, and as the price decreases, the quantity demanded increases. This is the
typical downward-sloping demand curve, where higher prices lead to lower quantities demanded,
and lower prices lead to higher quantities demanded.

In this example:

• When the price is $10, consumers demand 100 units of Product X.

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 • When the price is $30, the quantity demanded decreases to 60 units.

• When the price is $60, consumers do not want to buy any units of Product X.

This demand curve illustrates the inverse relationship between price and quantity demanded,
which is a fundamental concept in economics. It demonstrates how consumers respond to
changes in price, and businesses can use this information to set prices and make production and
marketing decisions.

Demand-Supply Equilibrium

Demand and supply equilibrium is a fundamental concept in economics that represents the point
at which the quantity of a good or service that consumers are willing and able to buy (demand)
equals the quantity that producers are willing and able to sell (supply). This equilibrium is crucial
in determining the market price and quantity of goods exchanged in a free market economy.

Chart and Graphical Representation:

To illustrate this concept, we can use a simple supply and demand graph. The X-axis represents
the quantity of the good or service, while the Y-axis represents the price. The demand curve,
typically sloping downward from left to right, represents the quantity that consumers are willing
to buy at various price levels. The supply curve, on the other hand, typically slopes upward from
left to right, indicating the quantity that producers are willing to sell at different price levels.

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At this equilibrium point, the market is efficient because the optimal amount of gasoline is being
produced and consumed. Equilibrium is important to create both a balanced market and an
efficient market. If a market is at its equilibrium price and quantity, then it has no reason to move
away from that point, because it’s balancing the quantity supplied and the quantity demanded.
However, if a market is not at equilibrium, then economic pressures arise to move the market
toward the equilibrium price and equilibrium quantity. This happens either because there is more
supply than what the market is demanding, or because there is more demand than the market is
supplying. This balance is a natural function of a free-market economy.

Also, a competitive market that is operating at equilibrium is an efficient market. Economists

typically define efficiency in this way: when it is impossible to improve the situation of one party
without imposing a cost on another. Conversely, if a situation is inefficient, then it becomes
possible to benefit at least one party without imposing costs on others.

In the graph above:

1. Demand Curve (D): This curve shows the relationship between the price of a good and
the quantity demanded by consumers. As the price decreases, the quantity demanded
increases, and vice versa.

2. Supply Curve (S): This curve depicts the relationship between the price of a good and
the quantity that producers are willing to supply. As the price increases, the quantity
supplied increases, and vice versa.

3. Equilibrium Point (E): The equilibrium point is where the demand and supply curves
intersect. At this point, the quantity that consumers want to buy equals the quantity that
producers are willing to sell. This determines the market price (P*) and the equilibrium
quantity (Q*).

4. Market Price (P): The price at which the quantity demanded equals the quantity
supplied, as determined by the intersection of the demand and supply curves.

5. Equilibrium Quantity (Q): The quantity of the good or service that is bought and sold
in the market at the equilibrium price.

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Changes in external factors can shift the demand and supply curves, leading to changes in the
equilibrium price and quantity. When demand increases or supply decreases, the equilibrium
price and quantity rise. Conversely, if demand decreases or supply increases, the equilibrium
price and quantity decrease.

Understanding the demand-supply equilibrium is essential for businesses, policymakers, and

consumers, as it provides insights into market dynamics and helps in making informed decisions
regarding pricing, production, and resource allocation.

Managerial economics

Managerial economics is a branch of economics involving the application of economic methods in the
organizational decision-making process. Economics is the study of the production, distribution, and
consumption of goods and services. Managerial economics involves the use of economic theories and
principles to make decisions regarding the allocation of scarce resources. It guides managers in making
decisions relating to the company's customers, competitors, suppliers, and internal operations.

Managers use economic frameworks in order to optimize profits, resource allocation, and the overall
output of the firm, whilst improving efficiency and minimizing unproductive activities. These frameworks
assist organizations to make rational, progressive decisions, by analyzing practical problems at both micro
and macroeconomic levels. Managerial decisions involve forecasting (making decisions about the future),
which involve levels of risk and uncertainty. However, the assistance of managerial economic techniques
aids in informing managers of these decisions.

Managerial economists define managerial economics in several ways:

1. It is the application of economic theory and methodology in business management practice.

2. Focus on business efficiency.

3. Defined as "combining economic theory with business practice to facilitate management's decision-
making and forward-looking planning."

4. Includes the use of an economic mindset to analyze business situations.

5. Described as "a fundamental discipline aimed at understanding and analyzing business decision
problems".

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6. Is the study of the allocation of available resources by enterprises of other management units in the
activities of that unit.

7. Deal almost exclusively with those business situations that can be quantified and handled, or at least
quantitatively approximated, in a model.

The two main purposes of managerial economics are:

To optimize decision-making when the firm is faced with problems or obstacles, with the consideration
and application of macro and microeconomic theories and principles.

To analyze the possible effects and implications of both short and long-term planning decisions on the
revenue and profitability of the business.

In order to optimize economic decisions, the use of operations research, mathematical programming,
strategic decision making, game theory and other computational methods are often involved. The methods
listed above are typically used for making quantitate decisions by data analysis techniques.

The theory of Managerial Economics includes a focus on; incentives, business organization, biases,
advertising, innovation, uncertainty, pricing, analytics, and competition. In other words, managerial
economics is a combination of economics and managerial theory. It helps the manager in decision-making
and acts as a link between practice and theory. Furthermore, managerial economics provides the tools and
techniques that allow managers to make the optimal decisions for any scenario.

Some examples of the types of problems that the tools provided by managerial economics can answer are:

The price and quantity of a good or service that a business should produce.

Whether to invest in training current staff or to look into the market.

When to purchase or retire fleet equipment.

Decisions regarding understanding the competition between two firms based on the motive of profit
maximization.

The impacts of consumer and competitor incentives on business decisions

Managerial economics is sometimes referred to as business economics and is a branch of economics that
applies microeconomic analysis to decision methods of businesses or other management units to assist
managers to make a wide array of multifaceted decisions. The calculation and quantitative analysis draws
heavily from techniques such as regression analysis, correlation and calculus.

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Supply and Demand

Supply and Demand Relationship

The law of supply and demand describes the relationship between producers and consumers of a product.
The law suggests that price set by the producer and quantity demanded by a consumer are inversely
proportional, meaning an increase in the price set is met by a reduction in demand by the consumer. The
law further describes that sellers will produce a larger quantity of the good if it sells at a higher price.

Excess demand exists when the quantity of a good demanded is greater than the quantity supplied. Where
there is excess demand, sellers can benefit by increasing the price. The inverse applies to excess supply.

Production theory

Production theory describes the quantity of a good a business chooses to produce. This decision is
informed by a variety of factors, including raw material inputs, labor, and capital costs like machinery.
The production theory states that a business will strive to employ the cheapest combination of inputs to
produce the quantity demanded. The production function can be described in its simplest form by the
function

Opportunity cost

The opportunity cost of a choice is the foregone benefit of the second best choice. Determining the
opportunity cost requires detailing the costs and benefits of each action the business is considering to
pursue, and the cost of choosing one activity over another. The decision-maker is then in the position to
choose the action with the highest payoff.

Theory of Exchange or Price Theory

The principle uses the conjecture of supply and demand to set an accurate price for a good. The aim of
price theory is to allocate a price for a good such that the supply of a good is met with equal demand for
the product. If a manager sets the price of a good too high, the consumer may think it is not worth the cost
and decide not to purchase the good, hence creating excess supply. The opposite occurs when the price is
set too low, causing demand for a good to be greater than supply.

Theory of Capital and Investment Decisions

Capital investment decisions are a critical factor in an enterprise. They involve determining the rational
allocation of funds that will enable an organization to invest in profitable projects or enterprises to

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improve the efficiency of organizations. The rational allocation of funds may include acquiring business,
investing in equipment, or determining whether an investment will improve the business at all.

Elasticity of demand

The elasticity of demand is a prominent concept in managerial economics. Established by Alfred

Marshall, elasticity of demand describes how sensitive a change in the quantity demanded is given a unit
change in price. In his own words, Marshall describes the concept as ‘The elasticity of demand in a
market is great or small according to as the amount demanded increases much or little for a given fall in
price and diminish much or little for a given rise in price.

The microeconomic principles are useful principles to inform manager's decision making. Managerial
economics draws upon all of these analytical tools to make informed business decisions.

Applications of Supply and Demand

Application means applying to some real market situation. Suppose the Lolly gained the perfect
competition, again they are trying to applying the Lolly in real market that is call application. By
that we mean application. The following applications of supply and demand relentlessly use the
idea that markets clear. Price adjusts to equate quantity supplied and quantity demanded.
Competition is drives this adjustment. When there is excess demand, buyers compete with each
other to access to scarce goods. When there is excess supply, sellers compete with each other to
get access to scarce buyers. The analysis of the previous section looks at supply and demand for
a particular quality.

So competition takes place on the single dimension of the monetary price. But as we will see
below, when price is constrained by legislation that mandates a ceiling or a floor, other
mechanisms beyond the monetary price are used to clear the market. So while we maintain the
result that price adjusts to clear the market, we will eventually broaden our concept of price to go
beyond the money price to include time or even quality changes. This is all just another way of
saying that there are no shortages or surpluses. They are eliminated by prices adjusting. This is a
highly simplified view of the world, but as we will see it leads to a number of useful results that
capture the essence of how markets respond to various forms of government intervention.

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Maximum price celling:

It is the means of control price. That price fixed the government.

An example is rent control, the figure below shows the changes in welfare resulting from a price
ceiling.
I Price Controls

• Before the price ceiling:

• Consumer surplus is areas A, B, & C
• Producer surplus is areas D, E, & F
• After the price ceiling:
• Consumer surplus is areas A, B, & D
• Producer surplus is area F
• Deadweight loss is areas C & E
Because the government sets the price below the market equilibrium, there is excess
demand for the good.

• Not everyone who would like to purchase the good is able to do so.
• This may result in other secondary effects, such as:
• people may have to wait in long lines to get the goods,
• a black market may develop,

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 • Demand for other goods may increase (e.g. people move to suburbs if they can't get an
apartment in the city).
• This is an example of a general equilibrium effect.
II Trade Policy

• Next, we considered how trade policy affects welfare.

Our example applies to a small country. Because it is small, the country is a price taker. That is,
its actions do not influence the world price of the Product being considered.

• Thus, we can apply our competitive model.

• If the country were large enough to affect prices throughout the world, the perfectly
competitive model would not apply.
There are two supply curves to consider.

• SDOM is domestic supply. This is what can be produced within the country.
• SW is the world supply. Because the country is small, it can purchase as much as it
wants at the price prevailing in world markets.

• Thus, this supply curve is horizontal.

Without trade, only the domestic supply matters. The equilibrium is at P0 and Q0.
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 With trade, the blue lines represent supply.
• The price that prevails in the market is the world price, PW
• Total quantity demanded at this price is QT.
• Domestic producers make as much as they can for that price. This is the blue portion of
SDOM.
• QD is the quantity produced at home.
• Foreign producers then provide the remaining goods.
• Thus, imports = QT - QD.
Finally, consider the change in welfare:

No trade:

• Consumer surplus is areas A & B.

• Producer surplus is areas C, D, & G.
With trade:

• Consumer surplus is areas A, B, C, D, E, & F.

• Consumers are better off. They buy more, and at a lower price.
• Producer surplus is area G.
• This is for domestic producers only.
• They are worse off because they face more competition, and thus sell fewer goods at a
lower price
• The gains from trade are areas E & F. These areas are only captured with free trade.

Next, we considered the effect of a tariff.

• A per unit tariff raises the world price in the country imposing the tariff.
• The new supply is SW + tariff.
• The new price with trade is thus PW + t.
• The total quantity demanded at this higher price is Q'T.

• Local producers can supply more at the higher price.

• Thus, Q'D is now produced locally.

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 • Imports fall to Q'T - Q'D.
• Finally, consider the change in welfare.

With free trade:

• Consumer surplus is areas A, B, C, D, E, & F.

• Producer surplus is area G.

With the tariff:

• Consumer surplus is areas A & B.

• Producer surplus is areas C & G.

• Revenue is area E.

• For each unit imported, the government collects the tariff. The tariff times the number of
imports is revenue to the government.

• The rectangle E represents this area.

• Areas D and F disappear. These are the deadweight loss.

• F represents lost opportunities because fewer units are purchased.

• D is lost because some goods are produced at a higher cost by local producers, rather than by
foreign producers.

• Consider, for example, the part time farmers in the Economist article on rice tariffs in Japan
who would be forced out of the market if Japan removed tariffs on rice.

• Consumers must now pay the higher cost of local production.

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III. Elasticity

• Elasticity tells us the percentage change that will occur in one variable due to a one percent
change in another variable.

It is a unit-free measure of comparison.

• Price elasticity of demand measures the sensitivity of quantity demanded to price changes. It
tells us the percentage change in quantity demanded for a 1% change in price.

εp = % change quantity demanded/% change price

Elastic vs. inelastic

• Absolute value > 1 = elastic

• Absolute value < 1 = inelastic

Demand curves are steeper when demand is inelastic

• Inelastic demand is a steep demand curve

• Quantity demanded does not change much, even for large changes in price.

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An extreme case is perfectly inelastic demand: quantity demanded is the same at any price:

Elastic demand is a flat demand curve.

• Even small changes in price result in large changes in quantity demanded.

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An extreme case is perfectly elastic demand: the price is the same for any quantity demanded.

Elastic vs. inelastic

• absolute value > 1 = elastic

• absolute value < 1 = inelastic
• Elasticity and revenue:

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 • When price is inelastic, price and revenue move together. An increase in price raises
revenue.
• Intuition: if demand is inelastic, consumers will not respond much to a change in price.
Most people still purchase the good, and they pay more to do so.
• When price is elastic, price and revenue move in the opposite direction. Revenues fall
when the price is raised.
Intuition: if demand is elastic, consumers respond strongly to a change in price. The drop in
quantity dominates the increased price.

Conclusion:

In the realm of business, economics plays a pivotal role in guiding strategic decisions.
Managerial economics equips businesses with the tools to navigate complex economic
environments, make informed choices about resource allocation, pricing strategies, and market
positioning, and respond to shifts in supply and demand. It empowers organizations to optimize
their operations, maximize profits, and remain competitive in an ever-evolving marketplace.

Moreover, the broader economic concepts like GDP, inflation, fiscal and monetary policies,
externalities, human capital, market failure, and market structures like monopoly and oligopoly,
all contribute to the overall understanding of how economies function at a macro and micro
level. These concepts have a far-reaching impact on businesses, governments, and individuals
alike.

In conclusion, a solid grasp of demand and supply dynamics, coupled with a deep understanding
of the economics of business, provides a valuable toolkit for individuals, firms, and policymakers
to navigate the complexities of our economic world. It serves as the cornerstone for informed
decision-making, efficient resource allocation, and the pursuit of economic prosperity and
stability. As businesses continue to adapt to changing market conditions and economic forces,
the application of economic principles remains critical for sustainable success.

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Joshi, K. (2023, May 31). Economics Statistics – By Country, Region, Type, Demographic,
Consumption, Revenue in the US, Sales Channel. Enterprise Apps Today.
https://www.enterpriseappstoday.com/stats/tea-statistics.html

Dhingra, G. (n.d.). Business Market Segmentation: Know your customers. Refresh

Ideas. https://www.refreshideas.com/blog/article/tea-market-segmentation-know-your-
customers

Demand-Supply- Financial Plan - BPlans. (n.d.). Bplans: Free Business Planning Resources and
Templates. https://www.bplans.com/marketing-strategy-business-plan/financial-plan

Uses of Demand-Supply: Know how to start in 2023. (n.d.). Compare & Apply India-
Paisabazaar.com. https://www.paisabazaar.com/business-loan/tea-business-plan/

Lavinsky, D. (2023). Shop Business Plan

Template. Growthink. https://www.growthink.com/businessplan/help-center/tea-shop-
business-plan

Christy, S. (2022). A Full-Proof Shop Business Plan : How To Start Guide. Bikayi
Learn. https://bikayi.com/b/-shop-business-plan

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