Managerial economics - Essay Example

Mechanism of Demand Within a market framework, demand for any commodity or good or service is generally referred to as an amount which will be purchased at a particular price during a particular period of time. Now the law of demand can be also incorporated so as to analyze the relationship between price and quantity. In the domain of microeconomics or price theory it can be stated that the other things remaining constant (Cetaris Paribus) the quantity demanded of a commodity increases when its price decreases and decreases when its price rises (normal commodity and the exceptions of the law of demand are eradicated in this case and is not of relevance) (Arnold, 2010, p.56). So it can be stated that there exists a negative or inverse relationship between price and quantity.

The negative association between price and quantity can be described as This negative relationship between price and quantity can be represented with the help of a linear demand curve by taking a smooth relation between price and quantity which can be depicted as follows: The above relationship can be depicted by the help of a two-dimensional graph with price and quantity axis. Fig. . the quantity supplied rises with the rise in price and falls with the fall in price as in there is a direct relationship between price and quantity (Tucker, 2010 , p.57). The supply function is given by: The relation between price and quantity can be shown with a short mathematical exercise and a graph. Fig. 2 The Supply Curve (Tucker, 2010 , p.57). The diagram above it is the supply curve and it has a positive intercept which ‘a’ is taken from both the (2) and (4).

The market equilibrium is said to achieve when the demand equals the supply curve and the intersection between the demand and supply curve gives us the equilibrium price on the vertical axis and quantity on the horizontal axis as depicted in the previous graphs. The answers to the questions can be explained with respect to diagrammatic framework which would be representing both demand and supply framework with equilibrium and the conditions deviating from the equilibrium. Fig. 3 The calculated Demand Curve Fig.

4 The calculated Supply Curve The calculated demand curve and the calculated supply curve are shown in the diagrams 3 and 4. Now the intersecting point of the demand and the supply curve would be giving us the equilibrium quantity of the pizzas in the market. In this particular case $ 6 is the equilibrium price and 81 quantities of pizza is the equilibrium quantity as at $ 6, 81 units of pizza are demanded and supplied and at this point there is no excess demand or excess supply existent in the market.

The equilibrium condition can be depicted with the help of the following diagram: Fig.5 The market equilibrium and adjustment procedure In the above figure, the equilibrium price is $ 4 and the equilibrium quantity is given