Tag Archives | demand

Supply and Demand Elasticity

See Also:
Economic Indicators
Balance of Payments
Stagflation
The Feds Beige Book
What are the Twin Deficits?

Supply and Demand Elasticity

Supply and demand elasticity is a concept in economics that describes the relationship between increases and decreases in price and increases and decreases in supply and/or demand. We have described it in greater detail below.

Price Elasticity of Demand Definition

In economics, demand refers to customers’ need or desire for a given product or type of product and their eagerness to purchase that product. The more customers want a certain product, the more demand there is for that product. Less desirable or necessary products have lower demand in the marketplace.

What is elasticity of demand? Price elasticity of demand refers to the degree to which demand is influenced by changes in price. Basically, price elasticity of demand describes consumers’ sensitivity to changes in price. For example, if the price of a product suddenly goes up, broadly speaking, fewer people will buy it because it is more expensive. Perhaps people can no longer afford the product, or perhaps they feel the product costs more than it is worth. Regardless, to some extent, at least academically speaking, when prices rise, demand falls.

If a slight price increase causes a large decline in demand, price elasticity is high. Similarly, if a slight price decrease causes large increase in demand, elasticity of price is high. On the other hand, if a large price increase is required to cause any decline in demand, price elasticity is low. And if large price decreases are needed to cause any increase in demand, elasticity of price is low.

In sum, if a small price change causes a dramatic change in demand, price elasticity is high – consumers are highly sensitive to price changes. If small price changes cause little or no effect on demand, and substantial price changes are needed in order to see any effect on demand, then price elasticity is low – customers are less price sensitive.

Elasticity of Supply

In economics, supply refers to the availability of a particular product in the marketplace. If a particular product or type of product is widely available in the marketplace, that product is amply supplied. If there is a dearth of a particular product or product type in the marketplace, that product is in short supply.

Supply is also related to price. When the price of a product rises, supply will increase. This is because the makers of the product want to maximize profits by selling as much of the product as they can while prices are high. This will flood the marketplace with that product, leading to an eventual overabundance of the product. When products are too abundant – when there is too much supply available – prices fall. If everyone in town has the same red hat, you won’t be able to charge very much for yours.

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supply and demand elasticity

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Sales Order

See Also:
Credit Sales
Daily Sales Outstanding (DSO)
How to compensate sales staff
Economic Order Quantity (EOQ)
Economic Income

Sales Order Definition

A sales order definition is an internal document which lists buyer and sales quantity for a given purchase. It is also a valuable document for operations. A sales order form generally indicates that no additional production effort will be applied to the product. Exceptions to this occur, as with the making of custom products.

Sales Order Explanation

A sales order, explained as the internal document which explains the sale, conveys important information to staff. Sales orders fully document the needs of a customer. When a sale first occurs, sales staff take valuable information about what the customer wants. After taking this information, it is added to either a document or database so that the customer’s needs can be fully addressed. This is the sales order.

2 Reasons Why A Sales Order Is Valuable

A sales order is valuable for 2 main reasons. First, it fully documents what the customer wants to buy. This is a valuable record to the sales staff because it can be reviewed later to gain information about the customer and their needs. At times additional information will be added to a sales order, such as amount of product delivered as compared to amount of product desired. All of the internal information regarding a sale is kept in the sales order, so it is extremely useful upon review. This is the value of a sales order vs invoice. An invoice merely includes the details, cost, and unpaid balance of the sale.

A sales order is also valuable for operational staff. Due to the fact that this document fully explains the demand of the customer, it contains valuable information for those preparing the delivery. This staff needs a sales order; processing products requires a full understanding of the order which is being processed. In this way a sales order vs purchase order is very different; the sales order includes internal information which is not important to the customer and thus not included in their purchase order.

Sales orders, traditionally, were a paper document. In modern times, the whole sales order book is kept in a single database. This way, staff can access the information quickly. In times where one piece of information is needed, staff can simply look into the database and answer their question. In times where the full information is needed, a printout or electronic copy can make this information accessible as well.

Sales Order Example

For example, Doug is the manager of a distribution plant of a major company. His job is vital to the company because it ensures that product leaves the warehouse in perfect condition to be delivered to the computer. Timeliness and attention to detail are Doug’s strengths. He will need to use them today.

Doug needs to prepare a large order. Since the company has recently signed this customer, a high paying account, Doug must make sure there are no problems with the order.

Doug receives the initial sales order from sales staff. They have fully laid out the needs of the customer. So, Doug will share this with the rest of his department.

Doug then passes this sales order processing off to his warehouse team. They carefully pull the items they plan to sell from the warehouse. They place them together on a palate and sent the items to the packaging department.

The packaging department assures that the items will not be destroyed in transit. They carefully place the product in sealed and shock-resistant boxes to prevent any issues. As an additional part of their efforts, they include any marketing materials in the package. This shows the value in this division: it is as much a function of marketing as it is a function of delivery.

Then, they place the product back on to palates. They place these palates next to the loading dock. Tomorrow, they will ship them.

At the last minute, sales staff receive an amendment to the purchase. Luckily, Doug’s branch uses electronic documents. He sends the document through the channels listed above. Then the rest of the order is processed and placed on the palate.

Conclusion

Finally, they load the product on the delivery truck. It will be sent to the offices of the customer. The delivery staff is well trained to assure professional distribution of the product and act as a good face for the company.

Doug is proud of how he processed the order. His department has done a good job. For their efforts, Doug will highlight and reward the delivery team at the next company meeting. Doug values this because is is an important morale builder. He does not need a morale builder, successful delivery of the product is motivational enough to Doug.

sales order, Sales Order Example, Sales Order Definition

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Mixed Economy

See Also:
Economic Order Quantity (EOQ)
Economic Production Run (EPR)
Accounting Income vs. Economic Income
Feasibility Study
Economic Value Added

Mixed Economy Definition

The mixed economy definition is an economy where both the private market and the government control the factors of production. It is the most common form of economy that exists in the world today. All of the major developed and developing nations are a mixed economy, as well as many of the smaller developed and developing nations. This is due to the fact that a completely capitalist economy, for example, has never existed. The term mixed economy is another name for dual economy.

Mixed Economy Explanation

A mixed economy is an economy which has government restrictions on some but not all of the economic factors. As a result, it is an important term in macroeconomics. This is because mixed economy countries are the most prevalent in the world.

In our mixed economy, United States government controls infrastructure, social services, and other factors. Outside of this, industries in the United States are more of a market economy, where goods and services are provided based on demand and price. Laws placed on them restrict the markets.

In the mixed economy system outside of the US, government decides what is best controlled by the free market. In situations believed to need outside assistance, government steps in to control industries with regulations or total state monopoly. Using the USA as another example, the energy industry was once a state monopoly. This restriction has since been lifted and competition has driven the price of energy down.

Pros and Cons

Mixed economy pros and cons differ from person to person. Some believe that government needs to control factors to avoid corruption and exorbitant prices on basic necessities. Whereas, others believe that the free market is the only method which moves fast enough to deal with the changes of consumers. The truth lies, surely, somewhere in between. Many economists argue that advantages are best utilized by using the government as a temporary solution, allowing the free market to make long term decisions.

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Mixed Economy

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Market Segmentation

See Also:
Market Positioning
Market Dynamics
Marketing Mix (4 P’s of Marketing)
Value Chain
Porter’s Five Forces of Competition

Market Segmentation Definition

Segmentation marketing is a smaller set within the market as a whole. You can divide this by age, gender, price, race, interests, etc. Often times marketers try and find these market segments to find the best way to offer a certain product or service.

Market Segmentation Explained

Market segment analysis is the process that involves finding a certain group with similar ideas or characteristics that will cause them to demand the same amount of products. For example, if a company makes toys, then they are not going to want to post ads on the History Channel or ESPN. Instead, they should position its ad campaign on the Disney Channel or Nickelodeon. The target which is kids will often be tuned into one of these channels making it a prime location for toy companies to advertise.

Marketing Segmentation Example

Joe Bob is looking to maximize the potential for an ad campaign that he would like to run for his company Haughty Purses. The purses that the company makes are all custom and made from real leather. The cost to make them is high and production is slow. After some marketing segmentation analysis Joe Bob finds that the target market for the company contains the following characteristics:

– Women
– Aged 20-30
– Fashion Idealistic
– Needs to be Exclusive

Joe Bob then finds that these women read the same fashion magazines and observe fashion shows when presented on television. Therefore, Joe Bob decides to target the market segment by providing ads with beautiful models of the age group with a snob like sensibility.

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Market Segmentation

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What is Deflation?

What is Deflation?

What is deflation? Deflation is the decline in the price for goods and services. It can also be referred to as the increase in the value of real money. In other words, it’s the value that the current currency will go up per unit of goods or services.

Deflation Explained

Deflation often occurs when the demand for goods or services drops. As this happens, the price of the current supply will often drop in order to meet demand. Deflation economics often happen during large recessions or depression times. Furthermore, deflation should also not be confused with the term disinflation which refers to a slowing effect of inflation or a slow increase in the price of goods and services.

Deflation Examples

Some common examples of when deflation has occurred are times like the Panic of 1837, the Civil War, as well as the Great Depression.

The Panic of 1837 was the first major time that deflation occurred as people rushed to banks there was an overall drop in the money supply as well a major decrease in the price of goods and services.

During the Civil War, there was another era of deflation as the United States set the dollar on a gold standard and reduced the amount of money printed during the war. This caused an overall drop in the money supply and therefore an overall drop in the prices.

Finally, the Great Depression was a time in which many banks failed and the ability to gain money became difficult thus causing deflation to occur and the price of goods to fall dramatically. This period of deflation is probably the most dramatic because of the time in which it took to climb back to normal levels of inflation.

what is deflation?

See Also:
What is Inflation?
Treasury Inflation Protected Securities (TIPS)
Consumer Price Index (CPI)
Supply and Demand Elasticity
Economic Indicators

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Average Cost

See Also:
Fixed Costs
Inventoriable Costs
Marginal Costs
Replacement Costs
Process Costing

Average Cost Definition

Average cost per unit of production is equal to total cost of production divided by the number of units produced. It is also known as the unit cost. Especially over the long-term, average cost normalizes the cost per unit of production. It also smooths out fluctuations caused by seasonal demand changes or differing levels of production efficiency.

Average Cost Per Unit Formula

Use the following formula to calculate average cost per unit:

Average Cost Per Unit = Total Production Cost / Number of Units Produced

Minimization

A company producing goods wants to minimize the average cost of production. The company also wants to determine the cost-minimizing mix and the minimum efficient scale. Companies with a lower average cost per unit of production are better able to defend against aggressive price-cutting among industry competitors than companies with a higher average cost per unit of production.

The cost-minimizing mix is the lowest cost input-output production mix, or the point at which a company can produce the most output for the least cost. This mix occurs at the point of tangency between the isoquant and isocost lines. In economics terminology, the isoquant line is the line that represents all different combinations of production inputs that produce the same quantity of output. In addition, the isocost line represents all possible combinations of production variables that add up to the same level of cost. The point of intersection between the isoquant and isocost lines is the point of cost minimization.

The minimum efficient scale is scale of production at which average cost of production reaches its minimum point. Up to a certain point, more production volume reduces the cost per unit of production. This is economies of scale. The more output that is produced, the more thinly spread the fixed costs of production across the units of output are. This ends up lowering the cost per unit. Furthermore, production economies of scale can lower the threat of new entrants (competitors) into the industry.

Accounting

In accounting, to find the average cost, divide the sum of variable costs and fixed costs by the quantity of units produced. It is also a method for valuing inventory. In this sense, compute it as cost of goods available for sale divided by the number of units available for sale. This will give you the average per-unit value of the inventory of goods available for sale.

average cost, average cost per unit

 

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Do You Know Who Your A-List Customers Are?

Do you know who your A-list customers are? I was in a board meeting last week when I heard an interesting story from one of the other board members. Mike recalled when he was a young man and developed an interest in electrical work. While continuing to work at his day job, Mike developed a skill for doing light (pardon the pun!) electrical work.

As time passed, the demand for Mike’s work increased. He would do odd jobs for people on the weekend and at night. He would install flood lights, ceiling fans and fixtures. In addition, friends and family would request favors which he was happy to do! As the request started pouring in Mike started keeping two lists; one for paying customers; the other for favors.

One day his brother-in-law asked if Mike would do a favor by installing a flood light for his father-in-law. Mike agreed and put the name on the list. Several months went by and the brother-in-law had not heard from Mike. When he asked Mike why he had not installed the light, Mike explained his two lists.

The first list was the A list. This list consisted of paying customers. The B list was for favors. Mike was happy to start working on the B list as soon as he had completed the A list. The brother-in-law thought for a moment, then said that he would like to be moved to the A list.

Do You Know Who Your A-List Customers Are?

Often, we lump our own customers together. We treat the loyal customer who pays promptly the same as the demanding customer who is never happy and pays slow! In fact, it is often the demanding customer who gets more of our attention.

The lesson of this story is that we should have an A list and a B list for our customers. The A list should consist of those customers that pay on time, value our services and refer our name. The B list is for customers that don’t value our services, dispute our fees and are late or slow paying our bills. We should constantly be increasing the length of the A list and shortening the B list.

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Do You Know Who Your A-List Customers Are?

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Do You Know Who Your A-List Customers Are?

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