BUS 640: Managerial Economics
People have long made condescending declarations that theories do not have any practical application to real world problems. But, the problem with people who make comments such as those is that they have not learned how to properly use theories to aid in breaking down real world processes. Profitable solutions usually require that people understand how the real world functions, which is often far too complex to comprehend without making the simplifying assumptions used in theories (Thomas and Maurice, 2011, p. 3). Economic theories allow us to make the complex a little less complicated by using the streamlined hypotheses that the theories provide. In this sense, managers can use an economic way of thinking about business problems to make predictions and explanations that are valid in the real world, even though the theory may ignore many of the actual characteristics of the real world (Thomas and Maurice, 2011, p. 4). Supply and demand is perhaps one of the most fundamental concepts of economics and is considered the backbone of a market economy (Investopedia, 2011, ¶ 1). With the simplicity of the laws of supply and demand, it is widely used by highly experienced market analysts and forecasters to make decisions that can greatly affect the profitability of a business (Thomas and Maurice, 2011, p. 36). Although the general concept of supply and demand is usually thought of when referring to consumer goods and services, it is also applied to other areas for resources such as labor, raw materials, and capital equipment. There are six principal variables that influence the quantity demanded of goods and services: the price of the good or service, the incomes of consumers, the prices of related goods and services, the tastes or preference patterns of consumers, the expected price of the product in future periods, and the number of consumers in the market (Thomas and...