Managerial Economics
Chapter 5 DEMAND ANALYSIS
QUESTIONS & ANSWERS Q5.1 Q5.1 Is the economic demand for a product determined solely by its usefulness? ANSWER No, two basic conditions must be met before economic demand is created. First, there must be value associated with acquiring and using the good or service. For individuals, this value is in terms of utility, well being, or satisfaction through consumption. For firms, this value is measured in terms of the profit created through resource employment. Second, there must be an ability to pay. Both individuals and firms must demonstrate an economic capability to acquire, or their wants will remain unfulfilled, and no economic demand will result. Q5.2 John Baptiste Say, a French economist from the early 19th century, is credited with stating, Asupply creates its own demand.@ Today, some economists appear to argue that Ademand creates its own supply.@ Explain why neither statement is precisely correct, and how demand and supply together create the market for goods and services. ANSWER In simplistic terms, supply is what is available, and demand is what is desirable. In the can-do world of the new millennium, some consumers have come to believe that everything is possible and that Ademand creates its own supply.@ Alas, that is not yet the case. While many companies continue to invent new and innovative products to meet consumer needs, not everything customers desire can be supplied. For example, there is no comprehensive cure for cancer. The forces of demand and supply work together to provide consumers what they want, within the realm of technological feasibility. The point Say was trying to make in arguing Asupply creates its own demand@ was simply that there can be no general glut or oversupply of goods and services in free and competitive markets. While it is possible for temporary Agluts@ to arise for particular goods and services, these gluts will be balanced by temporary shortage or under supply in the markets for other goods
QUESTIONS & ANSWERS Q5.1 Q5.1 Is the economic demand for a product determined solely by its usefulness? ANSWER No, two basic conditions must be met before economic demand is created. First, there must be value associated with acquiring and using the good or service. For individuals, this value is in terms of utility, well being, or satisfaction through consumption. For firms, this value is measured in terms of the profit created through resource employment. Second, there must be an ability to pay. Both individuals and firms must demonstrate an economic capability to acquire, or their wants will remain unfulfilled, and no economic demand will result. Q5.2 John Baptiste Say, a French economist from the early 19th century, is credited with stating, Asupply creates its own demand.@ Today, some economists appear to argue that Ademand creates its own supply.@ Explain why neither statement is precisely correct, and how demand and supply together create the market for goods and services. ANSWER In simplistic terms, supply is what is available, and demand is what is desirable. In the can-do world of the new millennium, some consumers have come to believe that everything is possible and that Ademand creates its own supply.@ Alas, that is not yet the case. While many companies continue to invent new and innovative products to meet consumer needs, not everything customers desire can be supplied. For example, there is no comprehensive cure for cancer. The forces of demand and supply work together to provide consumers what they want, within the realm of technological feasibility. The point Say was trying to make in arguing Asupply creates its own demand@ was simply that there can be no general glut or oversupply of goods and services in free and competitive markets. While it is possible for temporary Agluts@ to arise for particular goods and services, these gluts will be balanced by temporary shortage or under supply in the markets for other goods