Simple Economic Application
The most important concept, in economics, is the Demand and Supply subject/concept. Its relevance and importance can be understood by emphasizing the fact that all economic systems are based on Supply and Demand principles. However, only particular types of systems allow supply and demand forces to act independently to determine price and output. It is also very apparent that all types of businesses, in the free market economy, are affected by the changes in demand and supply and the interaction between the two forces.
In retail business too (of which I am a part as a retail store manager), we witness (almost every day) how changes in price and supply/demand affect quantity demanded and price/output respectively. For instance, when discounts are offered in particular products/goods/services, the quantity demanded of those particular products/goods/services, increases. This increase in quantity demanded translates into revenues that are more than the previous ones. It is also very evident that the change in quantity demanded for some goods and services, because of the change in price, are greater than the other goods and services. This phenomenon can be understood with the help of price elasticity of demand. It tells us how the elastic demand is for a particular good or service; For instance, if the demand curve for a particular good is flat, then it means that a little change in price can bring an enormous change in quantity demanded. However, if the demand curve is steep, then it means that a change in price will bring a little change in quantity demanded. In my retail store, there are some goods, which quantity demanded changes very little when price increases (steep demand curve).
I also observed that there were some products, which quantity demanded does not increase much when price decreased (discount was offered for that product); however, when the price increased, the decrease in quantity demanded was extraordinary. Readings, about various subjects of economics make it apparent that some products have a kinked demand curve and this happens when there are many close substitutes available. The upper part of the kinked demand curve is affected by different factors, and the lower part is affected by different economic realities. For instance, if the upper part of the demand curve is flatter than it is influenced by the price (increase in price will drastically decrease the quantity demanded the product/service) and if the lower part of the demand curve is steep this means that the preference – factor is strong (cross-price elasticity of demand).
The concept of price elasticity of demand is very relevant and applicable. In the retail business, it has great value, as it allows us to determine the prices of goods and services. It is a known fact that retail stores buy products/goods, in bulk, either from the wholesaler or the manufacturer. It allows retail stores to buy products/goods at a volume discount. If a retail store knows about the price elasticity of demand for particular goods, then it will be able to determine such price that swells revenue.
I have also learned that the capital structure of an organization plays a major role in determining its behavior and in devising of business strategy. Retail stores frequently take loans from banks to meet various business objectives and decision regarding taking a loan is directly associated with the interest rate. During the course, we studied in detail mortgage/loan and interest rate. The readings regarding these subjects have expanded my understanding regarding interest rates. For instance, I can calculate the yearly toll of an interest-based loan. Also, I have learned that there is a difference between real and nominal interest rates. All this information will enable me to take more informed and apt decisions about mortgage/loan.
As a manager, I have experienced that when the economy is doing well, the size of consumption increases. To me, consumption is the engine of economic growth, and it is represented by aggregate demand as whenever the aggregate demand shifts, the general price level increases. This increase, in consumption and the general price level, increases our profit and during this period retail stores seek soft short-term loans to expand their business. However, when aggregate demand shifts to the left, the size of consumption decreases and so does the price level. During this period, retail stores suffer the most, because they cannot benefit from the low-interest rates that are offered during that period.
In the end, I acknowledge that readings and assignments have affected positively in my understanding of the economy and business. I am more equipped to understand different economic phenomena from both academic and non-academic perspectives. The readings, lectures and the assignments are helpful in understanding how the economy works and how it affects businesses. Also, it also reveals which factors affect revenue, profit, demand, and supply. For instance, now I know that the price elasticity of demand facilitates in determining the appropriate price of products and services. Furthermore, I have learned how the better understanding of the relationship between loan and interests can facilitate individual businessmen in making sound decisions regarding the loans. Studying various subjects, about economics, will benefit my organization and me.
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