Management

The Concept of Demand and Its Role in Managerial Economics

The law of demand states that All other factors held constant, the higher the unit price of a good, the fewer the number of units demanded by consumers, and, consequently, sold by firms (Samuelson and Marks, 1995). Described in another way, it posits that slower price generally increases the amount of a commodity that people in the market are willing to buy (Baumol, 1997). The demand curves, which is downward sloping, expresses the relationship between price and quantity demanded by the market. The horizontal axis indicates the number of goods demanded by consumers and sold by a firm during a specific span of time. The vertical axis lists the price per unit or per a lot of the product. The demand curve in a model shows the firm’s theoretical sales level at various prices along the line.The demand schedule is a list of prices and the corresponding quantities derived from the intersection of straight lines starting from the axes, on specific points on the demand curve itself. The downward curve is explained by the fact that as price falls there is a corresponding increase in the sales volume. The downward slope means that the elasticity coefficient drawn from the line is a negative number. However, economists have done away with the negative sign of that elasticity and have expressed it as an absolute number. Another point to remember is that the straight-line demand curve does not have a uniform elasticity of 1 (also termed unit elasticity) at all points of the line. rather, the curve is elastic above the mid-point and inelastic below that midpoint.A firm’s economist draws the demand curve to explain to management what the profit consequences would be for each price alternative, as for example, when an airline considers giving selective fare discounts to travelers, or when analyzing the impact of fuel oil increases on the company’s pricing policies. The firm would use the demand curve in discussing the consequences of alternative output and pricing policies on the revenue targets over a certain future period.

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