For this discussion activity, revisit your demand function from Module 2, activity 2.2. which is located within the attachment section. Alter the function or add any additional variables/det
For this discussion activity, revisit your demand function from Module 2, activity 2.2. which is located within the attachment section. Alter the function or add any additional variables/determinants you think you need once you have read the chapter reading for this module and explain why you changed your equation using 350 to 400 words. The chapter reading can be found within the attachment section. Only read pages 42 through 50. Give 3 examples of current factors affecting the demand for your product/service and its effect on profitability.
Additional reference material can be found below:
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Case Study: Demand Analysis
Student Name
Lecture Name
Course
Date
Case Study: Demand Analysis
Introduction
Consumer preferences and financial resources have a significant impact on the demand for air travel. The purpose of this assignment is to provide a deeper understanding of the factors that determine the prices and elasticities of goods and services within the aerospace and aviation industries. Since the world's population is continuously increasing, there is a constant need for more flights in the aviation industry. In this regard, my preferred market would be the Malaysian airline business, which includes organizations like Malaysia Airline System Berthed (MAS), Firefly, which is a subsidiary of MAS, and Berjaya Air. The subject of my conversation would be airline tickets.
Oligopoly is the best way to characterize the market structure of the Malaysian airline industry. This structure indicates that multiple enterprises compete with one another for the available travelers. This structure also has a higher degree of competition compared to monopoly. Passengers, both domestic and international, make up the vast majority of these airlines' client base. Air travel has very few viable alternatives since most people who can afford it choose modes of transportation that are both more expedient and more comfortable. Since the bullet train is only available within the country and does not travel to any other countries, it might be considered a minor rival.
Factors determining demand and supply
Price
This is a significant component that plays a role in determining the level of demand and availability of airline services in Malaysia. For the vast majority of people, air travel is an extravagant luxury. The demand for such a service is very variable because it is used primarily by the wealthy, despite the fact that this mode of transportation is extremely pricy (Craig, 2019). The proliferation of low budget airlines and the threat posed by unrestricted users have made travelers increasingly price-conscious. Passengers, on the other hand, may be less price conscious when the revenue gained by these ticket revenue can become insignificant in relation to the overall cost of the trip. It is essential to have the understanding that the components of a trip, such as its routes and modes of transportation, are easily interchangeable. When passengers consider their many alternatives, it may be possible for them to reach a conclusion regarding their flight in a short amount of time.
Customer’s level of income
According to the data available, the income elasticity of demand for air travel is exceptionally high. When people have more disposable income, they are more likely to splurge on non-essentials like plane tickets. Long-distance travel would benefit from higher income elasticities whenever a country's economy is growing rapidly. Research also shows that those in the middle class have a preference for shorter commute times compared to those in the upper class.
The cost of other related goods
These costs have an effect not only on the demand but also on the supply of airline tickets. If the price of a complementary commodity went up, it would have the same effect on the price of flight tickets, which would, in turn, lead to a reduction in the number of people wanting to buy tickets.
Substitutes
The availability of alternatives can also have an impact on the cost of air travel. In consequence of this, the demand would eventually become exceedingly elastic. Alternative modes of transportation available in the air industry could include high-speed automobiles and bullet trains.
The Number of customers available
A substantial number of purchasers would, in turn, correspond to demand for airline tickets, which would result in a rise in the number of supplies made available by airlines.
Period
When there is a prolonged period, the demand elasticity will be able to grow because customers will be able to modify their behaviors to the pricing throughout the course of the longer period of time.
Demand function using multiple Independent variables For Malaysian airline
|
Notation |
Functional Specification |
Factor |
|
Pope |
P0P1*P0P2*10^-5 |
Population |
|
Bedim |
Bed1*Bed2*10^-6 |
The capacity of the beds |
|
Dusty |
Distance on road |
Distance |
|
Trite |
Dummy variable(0,1) |
Transit |
|
Prick |
Average ticket price |
Price |
|
Cetin |
Number of airlines on the route |
Count of Airline |
|
Trim |
Percentage of flight choices |
Travel match |
|
Scrim |
Availability |
Schedule |
|
Tami |
The time between starting and stopping |
Travel Time |
Logarithmic Regression Model
Logy = 0 + 1LogX1 + 2LogX2 + 3LogX3 +…,
When in Liner form it becomes
LogPaxij = 0 + 1LogPrcij + 2LogPopij + 3LogBedij + Trmij+5Ttmi6Trtij 7Cntij +
8Scdij + 9Dstij,
How Changes in different variables influence equilibrium prices and quantity
Flight costs can be estimated using market data on passenger demand and airline capacity. The term "price equilibrium" describes the point at which buyers and sellers reach a mutually agreeable price. If either supply or demand were to shift, the resulting shift in equilibrium pricing would be correspondingly different (O'Connell & Williams, 2016). For example, when gas is cheap, airlines can produce more plane tickets. Therefore, a wider variety of products would be made available at these costs. If production were to remain constant, the demand curve would shift to a new equilibrium, one that would be able to work through the glut of available product on the market. Buyers, who would be the people in this scenario, would have the ability to get more tickets at a significantly reduced cost.
The following factors influence the instantaneous changes in pricing trends for airplane tickets in the industry of airlines. These variables include things like the demand for seats, the cost of gasoline, the length of the routes that are offered, and the availability of seats (Wang, Zhang, & Zhang, 2018). The cost of fuel is one of the most important factors that determines pricing changes in the transportation business. The cost of flying and the operating costs of airlines both go up whenever the gross price of crude oil goes up. Because oil is a resource that is used up extremely quickly, the current state of the oil industry around the world is a highly significant factor. Since oil is a necessary component of airplanes, there is a strong correlation between the cost of the former and the cost of airline tickets (Scott, 2018).
A change in demand caused by a shift in customer preferences would almost certainly have an effect on the price that is offered on the market. An excellent illustration of this is the way in which the earthquake in Japan induced a change in the demand for tourist’s tickets in that country (Spasojevic, Lohmann, & Scott, 2018). The reduction in preference has the potential to bring about an internal shift in demand. A delay or breakdown in the global economy is another important aspect that plays a role in determining the price of airline tickets. When businesses are unable to generate as much revenue as they formerly did, they are compelled to reduce their overall revenue in order to keep their profit margins at the same level. However, it is essential to keep in mind that the drop in air travel is not due to the costs associated with flying; rather, it is due to the economic downturn that has been caused by the inability of enterprises to pick up. During the Asian crisis that occurred in the late 1990s, for instance, the number of individuals traveling to these nations was able to decrease by a good amount, which is an example of a beneficial thing.
When it comes to airplane travel, another important consideration is the government and the legislation it enacts. For instance, under this scenario, MAS, with the assistance of the Malaysian government, might be able to contact Singapore airlines about establishing a direct flight between Kuala Lumpur and Singapore in response to the continuously growing demand for such a service (Daley, 2016). The two administration are on good diplomatic relations and will come to an agreement since it is beneficial to the economic growth and development of both countries.
Conclusion
The aviation industry in Malaysia can be described as being extremely dynamic, with demand and supply at appropriate times playing a significant role in shaping the industry to a large extent. When discussing this industry, it is impossible to determine whether a statement is accurate or untrue because it is continuously evolving. However, the majority of economists agree that the number of airline tickets sold doubles after every ten years.
References
Craig, C. (2019). Estimating the income elasticity of demand for international air travel.
Daley, B. (2016). Air transport and the environment. Routledge.
O'Connell, J. F., & Williams, G. (2016). Air transport in the 21st century: key strategic developments. Routledge.
Wang, K., Zhang, A., & Zhang, Y. (2018). Key determinants of airline pricing and air travel demand in China and India: Policy, ownership, and LCC competition. Transport Policy, 63, 80-89.
Spasojevic, B., Lohmann, G., & Scott, N. (2018). Air transport and tourism–a systematic literature review (2000–2014). Current Issues in Tourism, 21(9), 975-997.
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Managerial Economics
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Subject: MANAGERIAL ECONOMICS Credits: 4
SYLLABUS
Basics of Managerial Economics Introduction to Economics, Basics of Managerial Economics, Introduction to Economics, Nature and Scope of Managerial Economics, Managerial Economics & Economics Related Disciplines Interrelationship with Other Subjects, Economics Tools Demand Theory Demand Analysis, Elasticity Concepts, Demand Forecasting, and Importance of Demand forecasting Cost of Production: Cost Analysis, Economic of Scale, Cost Reduction and Cost control, Capital Budgeting Production Theory Introduction to Production Concept, Production Analysis, Stage of Production, Return to Scale, Supply Analysis Market Analysis Introduction to market Structure, Perfect Competition, Monopoly, Oligopoly and Pricing Suggested Readings: 1. Managerial Economics – Analysis, Problems and Cases, P.L. Mehta, Sultan Chand Sons, New Delhi 2. Managerial Economics – Varshney and Maheshwari, Sultan Chand and Sons, New Delhi 3. Managerial Economics – D. Salvatore, McGraw Hill, New Delhi 4. Managerial Economics – Pearson and Lewis, Prentice Hall, New Delhi 5. Managerial Economics – G.S. Gupta, T M H, New Delhi
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NATURE AND SCOPE OF ECONOMIC ANALYSIS ————————————————————————————————————
Structure
1.1 Introduction to Economics
1.2 Concept of Economics in Decision Making
1.3 Scope of Managerial Economics 1.4 Relationship between Managerial Economics and Other Subjects 1.5Tools and Techniques of Decision Making
1.6 Review Questions
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1.1 INTRODUCTION TO ECONOMICS ————————————————————————————————————
This unit introduces you to the basic concepts of Economics. After going through this unit you will come to know how Economics is helpful for Managers in their Decision making process.
Objectives: • To analyze the concept of economics- scarcity and efficiency • Micro Economics and macro economics • Concept of managerial economics • How managerial economics differ from economics and its relationship with management
Good morning students, the basic purpose of our studying of economics are the efficient utilization of scarce resources. We always have to make choices amongst various alternatives available for efficient utilization of our scarce resources. The twin theme of economics is scarcity and efficiency. We will discuss this twin theme in detail before coming to managerial economics. Scarcity and Efficiency: The first question which comes here is what is Economics? Economics is the study of how society chooses to use productive resources that have alternative uses, to produce commodities of various kinds, and to distribute them among different groups. Two key ideas in economics: • Scarcity of goods
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• Efficient use of resources
Scarcity of goods
The word scarce is closely associated with the word limited or economic as opposed to unlimited or free. Scarcity is the central problem of every society. • Concept lies at the problem of resource allocation and problem of a business
enterprise. • The essence of any economic problem, micro or macro, is the scarcity of resources. • The managers who decide on behalf of the corporate unit or the national economy always face the economic problem of Scarcity of good quality of materials or skilled technicians
As a Marketing Manager: He may be encountering scarcity of sales force at his command
As a Finance Manager: He may be facing the scarcity of funds necessary for expansion or renovate a program As a Finance Minister of the Country: His basic problem when he prepares the budget every year is to find out enough revenue resources to finance the necessary expenditure on plans and programs. Thus, we see that Scarcity is a universal phenomenon. Let us attempt a technical definition of “Scarcity” • In economic terms it can be termed as “ Excess of Demand” • Any time for any thing if its demand exceeds its supply, that thing is said to be
scarce. • Scarcity is a relative term: Demand in relation to its supply determines the element of scarcity.
Problem:
Unemployment: Scarcity of jobs Unsold stock of inventory: Scarcity of buyers Under utilized capacity of plan: Scarcity of power or other support facilities. Had there been no scarcities there would not have been any managerial problem. It is only because of this scarcity a manager has to decide on optimum allocation of scarce resources of: • Man • Materials • Money • Time • Energy
Thus we see that every business unit or manager must aim at rational but optimum allocation of scarce resources. Optimality lies in finding the best use of scarce resources, given to the constraints.
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Efficiency of Resources
Economy makes best use of its limited resources. That brings the critical notion of efficiency. Efficiency denotes most effective use of a society’s resources in satisfying people’s wants and needs. Consider the Monopoly Situation: In economics we say that an economy is producing efficiently when it cannot make anyone economically better off without making someone else worse off. The essence of economics is to acknowledge the reality of scarcity and then figure out how to organize society in such a way, which produces the most efficient use of resources. Economics can be called as social science dealing with economics problem and man’s economic behavior. It deals with economic behavior of man in society in respect of consumption, production; distribution etc. Economics can be called as an unending science. There are almost as many definitions of economy as there are economists. We know that definition of subject is to be expected but at this stage it is more useful to set out few examples of the sort of issues which concerns professional economists. Example: For e.g. most of us want to lead an exciting life i.e. life full of excitements, adventures etc. but unluckily we do not always have the resources necessary to do everything we want to do. Therefore choices have to be made or in the words of economists “individuals have to decide “how to allocate scarce resources in the most effective ways”. For this a body of economic principles and concepts has been developed to explain how people and also business react in this situation. Economics provide optimum utilization of scarce resources to achieve the desired result. It provides the basis for decision making. Economics can be studied under two heads:
1. Micro Economics 2. Macro Economics
Micro Economics: It has been defined as that branch where the unit of study is an individual, firm or household. It studies how individual make their choices about what to produce, how to produce, and for whom to produce, and what price to charge. It is also known as the price theory and is the main source of concepts and analytical tools for managerial decision making. Various micro-economic concepts such as demand, supply, elasticity of demand and supply, marginal cost, various market forms, etc. are of great significance to managerial economics. Macro Economics: It’s not only individuals and forms that are faced with having to make choices. Governments face many such problems. For e.g. How much to spend on health; How much to spend on services; How much should go in to providing social security benefits. This is the same type of problem faced by all of us in our daily lives but in different scales. It studies the economics as a whole. It is aggregative in character and takes the entire economy as a unit of study. Macro economics helps in the area of forecasting. It includes National Income, aggregate consumption, investments, employment etc.
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Following are the various economic concepts which are useful for managers for decision making: • Price elasticity of demand • Income elasticity of demand • Cost and output relationship • Opportunity cost • Multiplier • Propensity to consume • Marginal revenue product • Production function • Demand theory • Theory of firm: price, output and investment decisions • Money and banking • Public finance and fiscal and monetary policy • National income • Theory of international trade
The Three Problems of Economic Organization: Because of scarcity, all economic choices can be summarized in big questions about the goods and services a society should produce. These questions are: • What to produce? • How to produce? • For whom to produce? What to Produce?
The first question every society faces is what to produce. Should a society build more roads or schools? Because of scarcity, society can not build everything it wants. Choices have to be made. Once a society determines what to produce it then needs to decide how much should be produced. In a market economy the "what" question is answered in large part by the demand of consumers?
How to Produce?
The next question a society needs to decide after what to produce is how to produce the desired goods and services. Each society must combine available technology with scarce resources to produce desired goods and services. The education and skill levels of the citizens of a society will determine what methods can be used to produce goods and services. For example, does a nation possess the technology and skills to pick grapes with a mechanized harvester, or does it have to pick the grapes by hand?
For whom to produce?
The final question each society needs to ask is for whom to produce. Who is to receive and consume the goods and services produced? Some workers have higher incomes than others. This means more goods and services in a society will be consumed by these wealthy individuals, and less by the poor. Different groups will benefit from the different ways that we choose to spend our money.
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Inputs and Outputs: Every economy must make choices about the economy’s inputs and outputs. Inputs: Commodities used to produce goods and services .A economy uses its existing technology to combine inputs to produce outputs. Output: The various useful goods and services that result from production process that is directly consumed or employs in further production. Another term for inputs is factors of production:
Factors of Production: It refers to the resources used to produce goods and services in a society. Economists divide these resources into the four categories described below. • Land refers to all natural resources. Such things as the physical land itself, water,
soil, timber are all examples of land. The economic return on land is called rent. For example, a person could own land and rent it to a farmer who could use it to grow crops. A second resource is labor. • Labor refers to the human effort to produce goods and services. The economic return on labor is called wages. Anyone who has worked for a business and collected a paycheck for the work done understands wages. A third factor of production is capital. • Capital is anything that is produced in order to increase productivity in the future. Tools, machines and factories can be used to produce other goods. The field of economics differs from the field of finance and does not consider money to be capital. The economic return on capital is called interest. • Finally, the fourth factor of production is called entrepreneurship. Entrepreneurship refers to the management skills, or the personal initiative used to combine resources in productive ways. Entrepreneurship involves the taking of risks. The economic return on entrepreneurship is profits
Meaning of Managerial Economics: It is another branch in the science of economics. Sometimes it is interchangeably used with business economics. Managerial economics is concerned with decision making at the level of firm. It has been described as an economics applied to decision making. It is viewed as a special branch of economics bridging the gap between pure economic theory and managerial practices. It is defined as application of economic theory and methodology to decision making process by the management of the business firms. In it, economic theories and concepts are used to solve practical business problem. It lies on the borderline of economic and management. It helps in decision making under uncertainty and improves effectiveness of the organization. The basic purpose of managerial economic is to show how economic analysis can be used in formulating business plans.
Definitions of Managerial Economics: In the words of Mc Nair and Merriam,” ME consist of use of economic modes of thought to analyze business situation”. According to Spencer and Seigelman it is defined as the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by the management”. Economic provides optimum utilization of scarce resource to achieve the
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desired result. ME’s purpose is to show how economic analysis can be used formulating business planning.
Managerial Economics = Management + Economics
Management deals with principles which helps in decision making under uncertainty and improves effectiveness of the organization. On the other hand economics provide a set of preposition for optimum allocation of scarce resources to achieve a desired result. Managerial Economics deals with the integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by management. In other words it is concerned with using of logic of economics, mathematics, and statistics to provide effective ways of thinking about business decision ————————————————————————————————————
1.2 CONCEPT OF ECONOMICS IN DECISION MAKING ———————————————————————————————————— Students, earlier we had discussed various aspects of economics- scarcity and efficiency and meaning and role of managerial economics. Now we will be discussing the various aspects of decision making.
What do you mean by Decision Making?
Well decision making is not something which is related to managers only or which is related to corporate world, but it is something which is related to everybody’s life. Whether a person is working or non working, irrespective of his/her field, decision making is important to everyone. You need to make decision irrespective of the work you are doing. As a student also you have to take so many decisions. Suppose at a particular point of time you want to go for a movie, and at the same point of you want to go for shopping then what you will do. You can’t do two things at the same point of time. You have to decide what to do first and what to do next. Therefore decision making can be called as choosing the right option from the given one. To decide is to choose. Whether to do this or to do that is what is decision making. Decision making is the most important function of business managers. Decision making is the central objective of Managerial Economics. Decision making may be defined as the process of selecting the suitable action from among several alternative courses of action. The problem of decision making arises whenever a number of alternatives are available. Such as: • What should be the price of the product? • What should be the size of the plant to be installed? • How many workers should be employed? • What kind of training should be imparted to them? • What is the optimal level of inventories of finished products, raw mate
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