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Managerial Economics - The classical economics - Research Paper Example

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Managerial Economics - The classical economics

Law of supply, on the other hand, proposes that firms would supply more of a good at a higher price than they would at a lower price. Again all other factors, notably scarcity of the good, are held constant. This results in an upward sloping supply curve. The market equilibrium is attained at a point where the demand and supply curves intersect giving us the equilibrium price. For airlines the fares are prices and the passenger seats sold by them the quantity demanded and the total passenger seats available with them as quantity supplied. Price elasticity of demand, in reference to airlines, would be a ratio that measures the percentage change in quantity demanded to a percentage change in the price. Symbolically it can be written as (Q/Q)/ (P/P).Price elasticity concept can be used to analyse the behaviour of consumers in reference to the variable price by observing the corresponding changes in the quantity demanded by the consumers. ...
Given the demand pattern a rough estimate of price elasticity can also be obtained as a ratio of the percentage price change over two time periods. In the instant case of New Zealand airfares, (Asia, 2005) gives us the following price change data-reproduced in Table 1 below, in respect of airfares prevailing and changed in New Zealand. The paper has assumed some quantity changes, corresponding to such price changes, according to the fact that airlines went in for the price increases indicative of the fact that on some routes and some classes of travel airlines found that price increases may not bring about reduction in quantity demanded-notably in first and business class; on the converse in some class and sector combinations (like India and economy class) there was a distinct operation of the demand law with price decreases being specifically noticeable. With the above assumptions regarding changes in quantities demanded, Table 1 below carries the price elasticity calculations:
Table 1: Price Elasticity calculations for Airlines in New Zealand
Airfare type
Qtr-over-Qtr Q2'05/Q1'05 Overall Percentage Change in Local Currencies (%)

[1]
Year-over-Year Q2'05/Q2'04 Overall Percentage Change in Local Currencies(%)[2]
Demand change over Qtr (%)
[3]
Demand change over Qtr (%)
[4]
Price Elasticity over Qtr
[3]/[1]
Price Elasticity over year
[4]/[2]
Elasticity Type
First Class
1.9
3.6
1.2
3.3
0.63
0.92
Inelastic
Business Class
1.8
4.4
1.2
4
0.67
0.91
Inelastic
Full Economy
1.2
3
1.8
4.5
1.50
1.50
Elastic
Discount Economy
1.1
4.2
1.2
5.6
1.09
1.33
Elastic
Lowest Peak-Season Excursion
0.7
0
1.8
6
2.57
Infinite
Infinite
Lowest Off-Season ...Show more

Summary

The classical economics is built on the paired concepts of the demand and supply. Micro economics analysis of the consumer behaviour is explained by means of the law of demand and the firm behaviour is explained by means of the law of supply. Law of demand simply states that, ceterus paribus, a consumer would demand less of a good if its price is higher and more of the same good if its price is lower…
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Managerial Economics - The classical economics essay example
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