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Managerial Economics - The classical economics
Pages 5 (1255 words)
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.
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. ...
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