Week 1-Basic Concepts Paper
Week 1-Basic Concepts Paper
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Date Created: 11/11/15
Running head: BASIC CONCEPTS 1 Basic Concepts ECO/415 September 6, 2010 Patrick O' Donnell BASIC CONCEPTS 2 Basic Concepts The Applying Supply and Demand Concepts simulation discusses the basic concepts in applied economics. The main goal of the simulation is to sustain the equilibrium point in the twobedroom rental market as a property manager for Good Life Management (GLM) in the city of Atlantis. Pricing, customer predilection, and population have an affect on demand. Supply however, concerns the quantity of apartments, the amount of available apartments, and the amount of rented apartments. In regard to the simulation, various issues are discussed, including the changes in supply and demand and the affect on the business environment, the significance of marginal analysis in decisionmaking, establishing suitable output levels, costs related to GLM, and a marketing scenario in which GLM encounters economic obstacles. Supply and Demand: Changes in the Business Environment Several variables influenced the supply and demand of twobedroom apartments. Shifts in the supply and demand of apartments were caused by altering population, consumer preferences, and the implementation of a price ceiling throughout nine years of GLM’s operation. These changes altered the decisionmaking process for the property manager. A decrease in demand subsequently resulted because of consumer preference. To adjust for the change, GLM converted twobedroom apartments to condominiums. A reaction to the change to condominiums was a decrease in supply. Therefore, both the supply and demand curves shifted left. Income, customer preference, and price were other determinates in demand. The supply curve is affected by “costs, technology, future expectations from sellers, and the number of BASIC CONCEPTS 3 sellers” (Keat & Young, 2009, p. 54). The additional variables cause the supply and demand curves to shift left or right depending on the affect of the variables; these shifts influence supply or demand at a given price. In year five of the scenario, and both year seven scenarios, the simulation demonstrates shifts in supply and demand. A new company moving into Atlantis causes a demand shift in the year five scenario. The population increase causes greater demand for the quantity of apartments. In January of year seven, consumers express their interest in purchasing detached homes rather than renting apartments. This change causes a decrease in the amount of apartments in demand. In July of the same year, consumer increase in purchasing continues and the decrease of demand is a result. Therefore, the supplier anticipation of the market’s future creates a decrease in the quantity of apartments GLM is prepared to make obtainable. As the simulation progressed, the rental price decreased causing demand to increase. However, the simulation realized the supply curve sloped upward. Therefore, the number of available apartments increased as the monthly rental rate escalated. For GLM to attract potential renters, the rent price had to be reduced. Alternatively, a decrease in available apartments causes pressure on the rental rate. To maintain equilibrium among demand and supply, the rental price was increased. The Significance of Marginal Analysis As the property manager analyzed the scenarios throughout the simulation, supply and demand shifts influenced decisionmaking. When increases in demand occurred, the choice to increase rent price was made. Subsequently, when demand decreased, the rent price was decreased as well. The implementation of a price ceiling created the addition of a fee, in the form BASIC CONCEPTS 4 of a deposit, to subsidize revenue. Additionally, renting apartments at a lower price was necessary to because of the increase in supply. As supply and demand shifted, the property manager had to examine the change in rental rate and the affect on supply and demand. Each alteration created a different result in finding the equilibrium point. The effect of each price adjustment was carefully analyzed to result in the best outcome for GLM and its potential clientele. Suitable Output Levels In summarizing the results of the simulation, the property manager upheld “good construction” for GLM. The first year resulted in reducing the vacancy rate below 15 % as requested. Reducing the rental price to $950 per month proved successful in filling 1900 apartments with a vacancy rate of five percent. Further, revenue was maximized at 1.81 million. The following portion of the simulation the property manager successfully chose the correct rental rate for leasing all apartments. During the third year, the property manager selected the correct rental rate to reach the necessary demand and supply equilibrium. In summary, GLM adjusted the rental rate to $1,050 per month and occupied 2,000 apartments in year three. In year five the property manager accurately assessed the effect of escalating population on the demand and supply of twobedroom apartments on a temporary lease. The equilibrium rate was also correctly identified. 2,250 apartments were in demand when Lintech, Incorporated moved operations to Atlantis and the rental rate was adjusted to $1300 monthly. During January of the seventh year, the property manager accurately assessed the affect of customer preferences and expectations on the demand and supply of apartments. The equilibrium of rental rate was also identified appropriately. Potential customers expressed BASIC CONCEPTS 5 interest in detached homes, however, supply was not affected and a surplus was the result. Equilibrium was achieved by pricing the apartments at $1300 per month and supplying 2,250 twobedroom apartments. During the ninth year, the property manager assessed the correlation of the price ceiling and the quantity of apartments in demand and supply. Atlantis experienced a transformation with an increase in businesses and residents. The government found necessary to impose a price ceiling of $1,550 on twobedroom apartment rentals. The price increased to $1,550 per month and 2,250 apartments were leased at that rate. However, 3,150 apartments were in demand, thus a shortage of 875 apartments were the result. The property manager was successful in identifying the correct number of apartments to lease at the price ceiling. The primary focus of the simulation was the management of twobedroom apartments and the affect of supply and demand. The simulation demonstrated variables that created alterations in demand and supply. Further, the simulation demonstrated shifts in supply and demand and the effect the decision created relatively to the shifts. The objectives and outcomes learned throughout the simulation can be an asset to many managers in various industries. Supply and demand are key elements in the decisionmaking process for any industry. Related costs As variables in the market altered, GLM made adjustments to changes and shifts in demand. GLM achieved these adjustments by changing prices, and reducing vacancy to augment revenue. Further, maintenance costs were considered in the amount of apartments leased versus the amount available. Too many rentals would increase maintenance costs at a lower rental rate; BASIC CONCEPTS 6 therefore, equilibrium was decided. As the customer’s preference altered, GLM renovated apartments into condominiums to satisfy customer needs. Marketing Situation: Economic Difficulties In the transportation industry, outsourcing to meet customer demands is often employed. Many companies contract delivery drivers to deliver packages on time and to meet demand. As volume decreases with an economic downturn, reducing the amount of contractors is a typical result. Further, as fuel prices increase, reducing the amount of delivery vehicles aids in cost saving as well. Reducing unnecessary drivers and vehicles helps to save payroll and fuel costs, therefore increasing revenue. However, as demand increases (as during the holiday months) a deficiency in drivers and vehicles can prove detrimental. Meeting the consumer’s requirements is crucial in maintaining customers and increasing revenues. Therefore, an equilibrium point must be reached several times throughout the year. As demand and supply shifts, adjustments to meet requirements must alter as well. BASIC CONCEPTS 7 Reference Keat, P. G., & Young, K. Y. (2009). Managerial Economics: Economic Tools for Today's Decision Makers (6th ed.). Pearson Education, Inc.: Prentice Hall.
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