Lesson 1: Economics and Managerial Decision Making

Managerial Economics and its Relationship to other business disciplines

Questions that Managers must Answer:

✓ What are the economic conditions in our particular market?

o market structure?
o supply and Demand?
o technology?
✓ Should our firm be in this business?
o if so, at what price?
o at what output level?
o can the firm achieve a sustainable competitive advantage?
✓ What are the additional economic conditions in our particular market?
o government regulations?
o international dimensions?
o future conditions?
o macroeconomic factors?
✓ What is our strategy to maintain a competitive advantage in the market?
o cost-leader?
o product differentiation?
o market niche?
o outsourcing, alliances, mergers?
o international perspective?
✓ What are the risks involved?
o changes in demand and supply?
o technological changes and the effect of competition?
o changes in interest and inflation rates?
o exchange rates changes for companies engaged in international trade?
 o political risk for companies with foreign operations?

Lesson 2: Managerial Economics - Introduction

Managerial Economics can be defined as amalgamation of economic theory with business
practices so as to ease decision-making and future planning by management.

Managerial Economics assists the managers of a firm in a rational solution of obstacles faced in
the firm’s activities. It makes use of economic theory and concepts. It helps in formulating
logical managerial decisions.

The key of Managerial Economics is the microeconomic theory of the firm. It lessens the gap
between economics in theory and economics in practice.

Managerial Economics is a science dealing with effective use of scarce resources. It guides the
managers in taking decisions relating to the firm’s customers, competitors, suppliers as well as
relating to the internal functioning of a firm. It makes use of statistical and analytical tools to
assess economic theories in solving practical business problems.

Study of Managerial Economics helps in enhancement of analytical skills, assists in rational

configuration as well as solution of problems. While microeconomics is the study of decisions
made regarding the allocation of resources and prices of goods and services, macroeconomics is
the field of economics that studies the behavior of the economy as a whole (i.e. entire industries
and economies).

Managerial Economics applies microeconomic tools to make business decisions. It deals with a
firm.
The use of Managerial Economics is not limited to profit-making firms and organizations. But it
can also be used to help in decision-making process of non-profit organizations (hospitals,
educational institutions, etc). It enables optimum utilization of scarce resources in such
organizations as well as helps in achieving the goals in most efficient manner. Managerial
Economics is of great help in price analysis, production analysis, capital budgeting, risk analysis
and determination of demand.
Managerial economics uses both Economic theory as well as Econometrics for rational
managerial decision making. Econometrics is defined as use of statistical tools for assessing
economic theories by empirically measuring relationship between economic variables. It uses
factual data for solution of economic problems.

Managerial Economics is associated with the economic theory which constitutes “Theory of
Firm”. Theory of firm states that the primary aim of the firm is to maximize wealth. Decision
making in managerial economics generally involves establishment of firm’s objectives,
identification of problems involved in achievement of those objectives, development of various
alternative solutions, selection of best alternative and finally implementation of the decision.
Managerial Economics and Managerial Decision Making

The following figure tells the primary ways in which Managerial Economics correlates to
managerial decision-making.
Lesson 3: Scope of Managerial Economics
Managerial Economics has a more narrow scope - it is actually solving managerial issues using
micro-economics. Wherever there are scarce resources, managerial economics ensures that
managers make effective and efficient decisions concerning customers, suppliers, competitors
as well as within an organization. The fact of scarcity of resources gives rise to three
fundamental questions:

a. What to produce?
b. How to produce?
c. For whom to produce?

To answer these questions, a firm makes use of managerial economics principles.

a. What to produce?
→ The first question relates to what goods and services should be produced and in
what amount/quantities. The managers use demand theory for deciding this. The
demand theory examines consumer behavior with respect to the kind of purchases
they would like to make currently and in future; the factors influencing purchase
and consumption of a specific good or service; the impact of change in these factors
on the demand of that specific good or service; and the goods or services which
consumers might not purchase and consume in future. In order to decide the
amount of goods and services to be produced, the managers use methods of demand
forecasting.
b. How to produce?
→ The second question relates to how to produce goods and services. The firm has now
to choose among different alternative techniques of production. It has to make
decision regarding purchase of raw materials, capital equipments, manpower, etc.
The managers can use various managerial economics tools such as production and
cost analysis (for hiring and acquiring of inputs), project appraisal methods( for long
term investment decisions),etc for making these crucial decisions.
c. For whom to produce?
→ The third question is regarding who should consume and claim the goods and
services produced by the firm. The firm, for instance, must decide which is it’s niche
market-domestic or foreign? It must segment the market. It must conduct a
thorough analysis of market structure and thus take price and output decisions
depending upon the type of market.
Lesson 4: Nature of Managerial Economics

Managerial Economics is a Science

➢ Managerial Economics is an essential scholastic field. It can be compared to science in a
sense that it fulfils the criteria of being a science in following sense:
➢ Science is a Systematic body of Knowledge. It is based on the methodical observation.
Managerial economics is also a science of making decisions with regard to scarce
resources with alternative applications. It is a body of knowledge that determines or
observes the internal and external environment for decision making.
➢ In science any conclusion is arrived at after continuous experimentation. In Managerial
economics also policies are made after persistent testing and trailing. Though economic
environment consists of human variable, which is unpredictable, thus the policies made
are not rigid. Managerial economist takes decisions by utilizing his valuable past
experience and observations.
➢ Science principles are universally applicable. Similarly policies of Managerial economics
are also universally applicable partially if not fully. The policies need to be changed from
time to time depending on the situation and attitude of individuals to those particular
situations. Policies are applicable universally but modifications are required
periodically.

Managerial Economics requires Art

➢ Managerial economist is required to have an art of utilizing his capability, knowledge

and understanding to achieve the organizational objective. Managerial economist should
have an art to put in practice his theoretical knowledge regarding elements of economic
environment.
Managerial Economics for administration of organization

➢ Managerial economics helps the management in decision making. These decisions are
based on the economic rationale and are valid in the existing economic environment.
Managerial economics is helpful in optimum resource allocation

➢ The resources are scarce with alternative uses. Managers need to use these limited
resources optimally. Each resource has several uses. It is manager who decides with his
knowledge of economics that which one is the preeminent use of the resource.

Managerial Economics has components of micro economics

➢ Managers study and manage the internal environment of the organization and work for
the profitable and long-term functioning of the organization. This aspect refers to the
micro economics study. The managerial economics deals with the problems faced by the
individual organization such as main objective of the organization, demand for its
product, price and output determination of the organization, available substitute and
complimentary goods, supply of inputs and raw material, target or prospective
consumers of its products etc.
Managerial Economics has components of macro economics

➢ None of the organization works in isolation. They are affected by the external
environment of the economy in which it operates such as government policies, general
price level, income and employment levels in the economy, stage of business cycle in
which economy is operating, exchange rate, balance of payment, general expenditure,
 saving and investment patterns of the consumers, market conditions etc. These aspects
are related to macro economics.
Managerial Economics is dynamic in nature

➢ Managerial Economics deals with human-beings (i.e. human resource, consumers,

producers etc.). The nature and attitude differs from person to person. Thus to cope up
with dynamism and vitality managerial economics also changes itself over a period of
time.

Lesson 5: Managerial Economics and Microeconomics

Managerial Economics is basically a blend of Economics and Management. Two branches of

economics i.e. microeconomics and macroeconomics are the major contributors to managerial
economics.

Microeconomics is the study of the behavior of individual consumers and firms whereas
microeconomics is the study of economy as a whole.
Microeconomics is a broader concept as compare to Managerial Economics. Microeconomics
forms the foundation of managerial economics. Almost all the concepts of Managerial
Economics are the perceptions of Microeconomics concepts.
Managerial Economics can be perceived as an applied Microeconomics. Demand Analysis and
Forecasting, Theory of Price, Theory of Revenue and Cost, Theory of Supply and Production are
major bare bones of Microeconomics that underpins the Managerial Economics. Managerial
Economics applies the theories of Microeconomics to resolve the issues of the organization and
for decision making.

The reliance of Managerial Economics on Microeconomics is made clearer in the points below:
▪ If a manager wants to increase the price of the product due to increase in cost of
production, he will analyze the price elasticity of demand for that product so that price
rise is not followed by substantial fall in the demand of the product. It is the application
of demand analysis to the real world situation.
▪ For fixing the price of the products managers applies the pricing theories, cost and
revenue theories of micro economics.
▪ Decisions regarding production and supply of the product in the market, knowledge of
availability of fixed and variable factors of production, state of technology to be used and
availability of raw-material are essential. This can be determined with the knowledge of
theory of production.
▪ Determination of price and output is possible with the acquaintance of market
structures and approaches pertinent for determination of price and output in the given
market setup.
▪ Managerial economics utilizes statistical methods such as game theory, linear
programming etc for application of Economic Theory in Decision making.
▪ One of the responsibilities of Manager is to workout budgets for different departments
of the organization which is learned from Capital Budgeting and Capital Rationing.
▪ Cost and benefit analysis helps the manager in decision making.
▪ Study of welfare economics helps Manager in taking care of social responsibilities of the
organization.
 ▪ Microeconomics is the study that deals with partial equilibrium analysis which is useful
for the manager in deciding equilibrium for his organization.
▪ Managerial Economics also uses tools of Mathematical Economics and econometrics
such as regression analysis, correlation analysis etc.

Lesson 5: Principles of Managerial Economics

Economic principles assist in rational reasoning and defined thinking. They develop logical
ability and strength of a manager. Some important principles of managerial economics are:
1. Marginal and Incremental Principle
This principle states that a decision is said to be rational and sound if given the firm’s
objective of profit maximization, it leads to increase in profit, which is in either of two
scenarios-
→ If total revenue increases more than total cost.
→ If total revenue declines less than total cost.

Marginal analysis implies judging the impact of a unit change in one variable on the other.
Marginal generally refers to small changes. Marginal revenue is change in total revenue per unit
change in output sold. Marginal cost refers to change in total costs per unit change in output
produced (While incremental cost refers to change in total costs due to change in total output).
The decision of a firm to change the price would depend upon the resulting impact/change in
marginal revenue and marginal cost. If the marginal revenue is greater than the marginal cost,
then the firm should bring about the change in price.

Incremental analysis differs from marginal analysis only in that it analysis the change in the
firm's performance for a given managerial decision, whereas marginal analysis often is
generated by a change in outputs or inputs. Incremental analysis is generalization of marginal
concept. It refers to changes in cost and revenue due to a policy change. For example - adding a
new business, buying new inputs, processing products, etc. Change in output due to change in
process, product or investment is considered as incremental change. Incremental principle
states that a decision is profitable if revenue increases more than costs; if costs reduce more
than revenues; if increase in some revenues is more than decrease in others; and if decrease in
some costs is greater than increase in others. Theory of firm, an important element of
microeconomics, is one of the most significant element of Managerial Economics.

2. Equi-marginal Principle
Marginal Utility is the utility derived from the additional unit of a commodity consumed.
The laws of equi-marginal utility states that a consumer will reach the stage of
equilibrium when the marginal utilities of various commodities he consumes are equal.
According to the modern economists, this law has been formulated in form of law of
proportional marginal utility. It states that the consumer will spend his money-income
on different goods in such a way that the marginal utility of each good is proportional to
its price, i.e.,
→ MUx / Px = MUy / Py = MUz / Pz
→ Where, MU represents marginal utility and P is the price of good.
→ Similarly, a producer who wants to maximize profit (or reach equilibrium) will use
the technique of production which satisfies the following condition:
→ MRP1 / MC1 = MRP2 / MC2 = MRP3 / MC3
→ Where, MRP is marginal revenue product of inputs and MC represents marginal cost.
 → Thus, a manger can make rational decision by allocating/hiring resources in a
manner which equalizes the ratio of marginal returns and marginal costs of various
use of resources in a specific use.
3. Opportunity Cost Principle
→ By opportunity cost of a decision is meant the sacrifice of alternatives required by
that decision. If there are no sacrifices, there is no cost. According to Opportunity
cost principle, a firm can hire a factor of production if and only if that factor earns a
reward in that occupation/job equal or greater than it’s opportunity cost.
→ Opportunity cost is the minimum price that would be necessary to retain a factor-
service in it’s given use. It is also defined as the cost of sacrificed alternatives. For
instance, a person chooses to forgo his present lucrative job which offers him
P50,000 per month, and organizes his own business. The opportunity lost (earning
P50,000) will be the opportunity cost of running his own business.
4. Time Perspective Principle
According to this principle, a manger/decision maker should give due emphasis, both to
short-term and long-term impact of his decisions, giving apt significance to the different
time periods before reaching any decision. Short-run refers to a time period in which
some factors are fixed while others are variable. The production can be increased by
increasing the quantity of variable factors. While long-run is a time period in which all
factors of production can become variable. Entry and exit of seller firms can take place
easily. From consumers point of view, short-run refers to a period in which they
respond to the changes in price, given the taste and preferences of the consumers, while
long-run is a time period in which the consumers have enough time to respond to price
changes by varying their tastes and preferences.
5. Discounting Principle
According to this principle, if a decision affects costs and revenues in long-run, all those
costs and revenues must be discounted to present values before valid comparison of
alternatives is possible. This is essential because a peso worth of money at a future date
is not worth a peso today. Money actually has time value. Discounting can be defined as
a process used to transform future peso into an equivalent number of present peso. For
instance, P1 invested today at 10% interest is equivalent to P1.10 next year.
→ FV = PV*(1+r)t
→ Where, FV is the future value (time at some future time), PV is the present value
(value at t0, r is the discount (interest) rate, and t is the time between the future
value and present value.

Lesson 6: Role of a Managerial Economist

A managerial economist helps the management by using his analytical skills and highly
developed techniques in solving complex issues of successful decision-making and future
advanced planning.

The role of managerial economist can be summarized as follows:

1. He studies the economic patterns at macro-level and analysis its significance to the
specific firm he is working in.
2. He has to consistently examine the probabilities of transforming an ever-changing
economic environment into profitable business avenues.
3. He assists the business planning process of a firm.
4. He also carries cost-benefit analysis.
 5. He assists the management in the decisions pertaining to internal functioning of a firm
such as changes in price, investment plans, type of goods /services to be produced,
inputs to be used, techniques of production to be employed, expansion/ contraction of
firm, allocation of capital, location of new plants, quantity of output to be produced,
replacement of plant equipment, sales forecasting, inventory forecasting, etc.
6. In addition, a managerial economist has to analyze changes in macro- economic
indicators such as national income, population, business cycles, and their possible effect
on the firm’s functioning.
7. He is also involved in advising the management on public relations, foreign exchange,
and trade. He guides the firm on the likely impact of changes in monetary and fiscal
policy on the firm’s functioning.
8. He also makes an economic analysis of the firms in competition. He has to collect
economic data and examine all crucial information about the environment in which the
firm operates.
9. The most significant function of a managerial economist is to conduct a detailed
research on industrial market.
10. In order to perform all these roles, a managerial economist has to conduct an elaborate
statistical analysis.
11. He must be vigilant and must have ability to cope up with the pressures.
12. He also provides management with economic information such as tax rates, competitor’s
price and product, etc. They give their valuable advice to government authorities as well.
13. At times, a managerial economist has to prepare speeches for top management.

Consumer Demand - Demand Curve, Demand Function & Law of Demand

What is Demand?

Demand for a commodity refers to the quantity of the commodity that people are willing to
purchase at a specific price per unit of time, other factors (such as price of related goods,
income, tastes and preferences, advertising, etc) being constant.
Demand includes the desire to buy the commodity accompanied by the willingness to buy it and
sufficient purchasing power to purchase it. For instance-Everyone might have willingness to
buy “Mercedes-S class” but only a few have the ability to pay for it. Thus, everyone cannot be
said to have a demand for the car “Mercedes-s Class”.
Demand may arise from individuals, household and market. When goods are demanded by
individuals (for instance-clothes, shoes), it is called as individual demand. Goods demanded by
household constitute household demand (for instance-demand for house, washing machine).
Demand for a commodity by all individuals/households in the market in total constitute market
demand.
Demand Function
➢ Demand function is a mathematical function showing relationship between the quantity
demanded of a commodity and the factors influencing demand.
Dx = f (Px, Py, T, Y, A, Pp, Ep, U)
In the above equation,
Dx = Quantity demanded of a commodity
Px = Price of the commodity
Py = Price of related goods
T = Tastes and preferences of consumer
Y = Income level
A = Advertising and promotional activities
Pp = Population (Size of the market)
Ep = Consumer’s expectations about future prices
U = Specific factors affecting demand for a commodity such as seasonal changes, taxation policy,
availability of credit facilities, etc.

Law of Demand
➢ The law of demand states that there is an inverse relationship between quantity
demanded of a commodity and it’s price, other factors being constant. In other words,
higher the price, lower the demand and vice versa, other things remaining constant.
Demand Curve
➢ Demand curve is a diagrammatic representation of demand schedule. It is a graphical
representation of price- quantity relationship. Individual demand curve shows the
highest price which an individual is willing to pay for different quantities of the
commodity. While, each point on the market demand curve depicts the maximum
quantity of the commodity which all consumers taken together would be willing to buy
at each level of price, under given demand conditions.
➢ Demand curve has a negative slope, i.e, it slopes downwards from left to right depicting
that with increase in price, quantity demanded falls and vice versa. The reasons for a
downward sloping demand curve can be explained as follows
a. Income effect- With the fall in price of a commodity, the purchasing power of
consumer increases. Thus, he can buy same quantity of commodity with less
money or he can purchase greater quantities of same commodity with same
money. Similarly, if the price of a commodity rises, it is equivalent to decrease in
income of the consumer as now he has to spend more for buying the same
quantity as before. This change in purchasing power due to price change is
known as income effect.
b. Substitution effect- When price of a commodity falls, it becomes relatively
cheaper compared to other commodities whose price have not changed. Thus,
the consumer tend to consume more of the commodity whose price has fallen,
i.e, they tend to substitute that commodity for other commodities which have
not become relatively dear.
c. Law of diminishing marginal utility- It is the basic cause of the law of demand.
The law of diminishing marginal utility states that as an individual consumes
more and more units of a commodity, the utility derived from it goes on
decreasing. So as to get maximum satisfaction, an individual purchases in such a
manner that the marginal utility of the commodity is equal to the price of the
commodity. When the price of commodity falls, a rational consumer purchases
more so as to equate the marginal utility and the price level. Thus, if a consumer
wants to purchase larger quantities, then the price must be lowered. This is what
the law of demand also states.
Exceptions to Law of Demand
The instances where law of demand is not applicable are as follows
 ➢ There are certain goods which are purchased mainly for their snob appeal, such as,
diamonds, air conditioners, luxury cars, antique paintings, etc. These goods are used as
status symbols to display one’s wealth. The more expensive these goods become, more
valuable will be they as status symbols and more will be there demand. Thus, such
goods are purchased more at higher price and are purchased less at lower prices. Such
goods are called as conspicuous goods.
➢ The law of demand is also not applicable in case of giffen goods. Giffen goods are those
inferior goods, whose income effect is stronger than substitution effect. These are
consumed by poor households as a necessity. For instance, potatoes, animal fat oil, low
quality rice, etc. An increase in price of such good increases its demand and a decrease in
price of such good decreases its demand.
➢ The law of demand does not apply in case of expectations of change in price of the
commodity, i.e, in case of speculation. Consumers tend to purchase less or tend to
postpone the purchase if they expect a fall in price of commodity in future. Similarly,
they tend to purchase more at high price expecting the prices to increase in future.
Price Elasticity of Supply
Just like the law of demand, the law of supply also explains the qualitative relationship between
price and supply. Qualitative relationships do not reveal the complete picture. For instance, it
helps only up to a certain point to know that the quantity supplied as well as price move in the
same direction. However, this is incomplete information. Economists and decision makers
needed to know the magnitude of this movement. It is for this reason that they created this
concept of price elasticity of supply.
In a way, the concept of price elasticity of supply is a mirror image of the concept of price
elasticity of demand. There are however, some minor differences which will be discussed in this
article. The elasticity of supply is based on the seller’s willingness to change the quantity
supplied at different prices. In this article, we will look at this concept of elasticity of supply in a
little bit more detail:
Concept: The definition of price elasticity of supply is as follows:
➢ The measure of how much the quantity supplied of a good responds to a change in the
price of that good, computed as a percentage change in quantity supplied divided by the
percentage change in price.
➢ In simpler words, the idea is to look at how many percentage points does the supply
change if the price changes by 1%. Based on the law of supply it is assumed that the
change will always be in the same direction i.e. if price moves upwards, so does the
quantity supplied and vice versa.
Calculation:
From the definition discussed above, we can derive the formula for price elasticity of demand as
follows:
Price Elasticity of Supply = Percentage Change in Quantity Supplied / Percentage Change
in Prices
= (Q2-Q1) / Q1 * 100 / (P2-P1) / P1 * 100
Let’s consider an example for better understanding. Let’s say that for a given product X, the
price earlier was $2 and the units supplied were 400. Now, the price increased to $2.5 and the
units supplied have changed to 600. In this case, the calculation will be as follows:
= (600 - 400) / 400 * 100 / ($2.5 - $2) / $2 * 100
= 50% / 25%
 =2
In this case the interpretation is that a 1% change in price will lead to a 2% change in the
quantity supplied. As we can see here, that the elasticity of supply could range anywhere
between negative infinity to positive infinity. However in 95% of the cases, it will be restricted
from negative 10 to positive 10.
In many markets as well as well as industries, the idea that the elasticity of supply remains the
same across the supply curve is not well received. There are economists who believe that
suppliers react more to price changes when they first happen and when they happen in large
magnitudes. Hence, in these cases elasticity may be computed at multiple points on the same
curve to receive different elasticity numbers.
In fact, the concept of elasticity has a major correlation with the shape of the supply curve.
However, discussing the same is beyond the scope of this article.
Only One Type: The price elasticity of supply looks at the market from the point of view of the
supplier. Hence, in almost all cases it is only sensitive to prices. It is not affected by factors such
as income levels of suppliers. Hence, we do not have such a concept as income elasticity of
supply. Also, the supply of one product is less likely to interfere in the quantity supplied of
another product. Hence, cross elasticity of supply is also not much of a consideration. Hence,
unlike elasticity of demand where there are different types possible, the elasticity of supply is
more or less based on a single type.

Determinants of Price Elasticity of Supply

Like price elasticity of demand, price elasticity of supply is also dependent on many factors.
Some of these factors are within the control of the organization whereas others may be beyond
their control. Regardless of the control, if the management has knowledge about these factors, it
can manage its supply better.
Here is a list of determinants which generally affect the price elasticity of supply in the market:
1. Capacity Addition: The theoretical model stated in the law of supply simply assumes
that supply will be able to adjust up and down as and when the price changes. In doing
so, the law of supply ignores the ground realities that are related with supply.

Consider for instance the fact that most manufactured goods today are mass produced
in massive factories and most of these factories are working to their optimum levels.
Hence, if supply has to be increased new capacity needs to be added i.e. new factories
need to be built.

This obviously means that supply will remain stagnant for a while when capacity is
stagnant and may then increase by leaps and bounds when additional capacity is
introduced. This is an important determinant of elasticity of supply. Products where
capacity can be easily added and reduced have an elastic supply whereas products
where it is difficult to increase or decrease capacity have inelastic demand.

2. Related Infrastructure Growth: Industry is usually an interconnected supply chain. If

one part of the supply chain grows, whereas the rest of the supply chain remains
stagnant, the growth will be lopsided. This affects the elasticity of supply as well.

Consider the case of agriculture. Let’s assume that farmers have got hold of a
revolutionary technique with which they can increase productivity two fold. However,
more production would mean more warehouses, more cold storages and even more
transport vehicles. If this related infrastructure does not grow, producers may have to
 willfully cut down their production to avoid wastage. So, if the related infrastructure is
easily scalable, then the supply of such a product will be highly elastic or else it will be
inelastic.

3. Perishable vs. Non Perishable: Storage capacity is not the only issue. The supplier also
needs to consider whether or not the goods that they hold are perishable or not.
Perishable goods have a limited shelf life and the buyers know it.

The buyers can wait for some time and producers will have to lower the prices or take
the losses that arise from wastage. The supply of perishable goods is therefore highly
elastic since whatever has been produced has to be disposed off at the earliest. However,
when it comes to non perishable goods it has been observed that the supply is usually
inelastic since producers can hold on for as long as they have to. They are under no
immediate compulsion to sell and hence the supply is inelastic.

4. Length of Production Period: The law of supply assumes that changes in price will
produce an immediate effect in the quantity supplied. This may be theoretically correct.
However, this is not possible in reality for many products.

Production is a time and resource consuming process. Hence, it cannot be scaled up or

down with that much ease. In many cases, the time required for production stretches to
many months or even years. Hence, there is a lagging effect on supply. This is another
important determinant of the elasticity of supply. Products whose production times take
longer have relatively inelastic supply compared to those products where the
production time is less.

5. Marginal Cost of Production: The law of supply also assumes that the profitability of
the supplier does not change with the number of units sold. That is not the case. In
reality, we have something called the economies of scale and diseconomies of scale. This
influences the marginal cost of production.

Hence, it may sometimes make economic sense to sell more whereas at other times, it
may make more economic sense to sell less! Because producers consider marginal cost
of production while making their decisions, it has become an important determinant in
the elasticity of supply.

6. Long Run vs. Short Run: In the short run, the supply of all products is more or less
inelastic. This is because there are many factors which producers cannot vary in the
short run. However, in the long run, all the factors are variable and hence the supply of
all products is completely elastic. Hence companies must be careful while making capital
decisions.
The above mentioned list of factors is not exhaustive. However, using the reasoning behind
these factors one can easily come up with more and more factors that may determine the price
elasticity of supply.

Panoorin mo nalang yung mga vid........

“AMEN”