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Price and Output are determined by the interaction of the market forces of Demand and Supply.
Demand curve: Slopes downward towards the right showing there is an inverse relationship between price and quantity demanded.
Supply curve: Slopes upward towards the right showing that there is a positive relationship between price and quantity supplied.
Quantity Demanded & Supplied Market forces will cause price to change until quantity demanded equals quantity supplied, and no shortages or surpluses will exist . E Q 2 Q Q 1 0 P r i c e (RS.) P 1 P P 2 D D S S F G H I
What events might cause both demand and supply to increase?
Market price has increased with strong sales growth.
Quantity Demanded & Supplied E Q Q 1 0 P r i c e ( RS ) P 1 P D D S S S 1 S 1 D 1 D 1 D 1 E 1
PRODUCTION POSSIBILITY CURVE - a model of the economy showing how choices are made among scarce resources and their economic consequences.
PPC -shows alternative combinations of goods/services that can be attained if all resources are fully employed and used efficiently.
A 0 Food (million tons) Clothing ( million units ) D. Unemployed resources; Unattainable combination C B Production Possibility curve X Y P P
Effect of Economic Growth on Production Possibility Curve. Food (million tons) Clothing ( million units ) Production Possibility Curve Before Growth .D Production Possibility Curve after growth 0 .A . B X Y
Shifts the PPC outside, allowing
to be produced
P P P’ P’
Macro Economics Applied to Business Environment
Business is influenced not only by what decisions are taken within the firm but also by the general business environment.
They are related to overall economic, social and political atmosphere of the country.
Economic theories have wide application to business decision making. It depends on the managers’ own understanding, experience , intelligence and training as to how to use the tools of economic analysis to find correct answers to the practical managerial problems.