Difficulty: Introductory | Prerequisites: None. This is foundational review material suitable as a starting point for the course.
Managerial economics applies microeconomic theory to business decision-making. This opening review covers the bedrock concepts you will use throughout APEC 3002: how markets work, how prices are determined, and what causes supply and demand to shift. If you are comfortable with these ideas, the rest of the course (production theory, cost analysis, market structures, pricing strategy) will build on them directly. If any of this feels unfamiliar, spend time here before moving on, because nearly every later topic assumes fluency with equilibrium, elasticity, and the mechanics of supply and demand.
Markets exist wherever buyers and sellers exchange goods or services, and the price at which they trade settles at equilibrium, where quantity supplied equals quantity demanded. Demand curves shift when consumer preferences, income, population, related-good prices, or expectations change. Supply curves shift when technology, weather, regulations, input prices, or resource endowments change. A movement along a curve is caused by a price change; a shift of the curve is caused by everything else.
Positive economics
The branch of economics concerned with describing and explaining what is, based on observable facts and testable statements. In simple terms, it asks "what happens?" rather than "what should happen?"
Normative economics
The branch of economics concerned with what should be, grounded in value judgements and opinions about policy or outcomes. Think of it as the prescriptive side: recommendations, not descriptions.
Market
A place (physical or virtual) where buyers and sellers meet to exchange valuable goods and services. In simple terms, any arrangement that brings together people who want to buy and people who want to sell.
Nominal price
The listed or sticker price of a good at a given point in time, with no adjustment for inflation. Think of it as the number you actually see on the price tag today.
Real price
The price of a good adjusted for interest and inflation over time, allowing meaningful comparison across different periods. In simple terms, it tells you what something "really" costs in terms of purchasing power.
Indifference curve
A graphical illustration showing all combinations of two goods between which a consumer is indifferent, meaning each combination yields the same level of utility. Think of it as a contour line on a satisfaction map.
Rate of marginal substitution (MRS)
The rate at which a consumer is willing to give up one good in exchange for more of another while staying on the same indifference curve. In simple terms, it is the personal "exchange rate" between two goods that keeps you equally happy.
Demand function
A mathematical relationship expressing quantity consumed as a function of price (and potentially other variables such as income and the prices of related goods). Think of it as the rule that tells you how much people buy at any given price.
Price elasticity of demand
The ratio of the percentage change in quantity demanded to the percentage change in price, holding other factors constant. In simple terms, it measures how sensitive buyers are to a price change.
Income elasticity of demand
The ratio of the percentage change in quantity demanded to the percentage change in consumer income. It tells you whether a good is normal (positive elasticity) or inferior (negative elasticity).
Price elasticity of supply
The ratio of the percentage change in quantity supplied to the percentage change in price, assuming all other factors that influence supply remain unchanged. Think of it as how responsive producers are when the price moves.
Substitutes
Two goods that are replacements for each other. When the price of one rises, demand for the other tends to increase. Example: butter and margarine.
Complements
Two goods that are used in conjunction. When the price of one rises, demand for the other tends to fall. Example: printers and ink cartridges.
Production function
A mathematical model, table, or graph that relates the maximum output level achievable for a given combination of inputs. In simple terms, it is the recipe that converts labour, capital, and materials into finished goods.
Supply function
The relationship between quantity supplied and all of the determinants of supply (price, input costs, technology, regulations, etc.).
Market equilibrium
The point at which quantity supplied equals quantity demanded, so there is no surplus and no shortage. Think of it as the price at which the market "clears."
A change in price causes a movement along the demand curve. A shift of the curve means the entire relationship between price and quantity demanded has changed due to something other than the good's own price.
Five factors shift the demand curve:
Consumer preferences – Tastes change (trends, advertising, health scares). If consumers suddenly prefer a good more, demand shifts right at every price.
Prices of related goods – A rise in the price of a substitute increases demand for this good. A rise in the price of a complement decreases demand for this good.
Population – More potential buyers shift demand right; fewer shift it left.
Income – For a normal good, higher income shifts demand right. For an inferior good, higher income shifts demand left.
Consumer expectations – If buyers expect the price to rise tomorrow, they buy more today (demand shifts right now).
The same movement-vs-shift logic applies on the supply side. A change in the good's own price is a movement along the supply curve. Everything else shifts it.
Five factors shift the supply curve:
New technology – Better production methods lower costs and shift supply right (more output at every price).
Weather – Particularly relevant in agriculture and energy. Favourable weather shifts supply right; adverse weather shifts it left.
Regulations – Stricter environmental or safety rules raise production costs and shift supply left. Deregulation can shift it right.
Input prices – If wages, raw materials, or energy costs rise, production becomes more expensive and supply shifts left.
Resource endowments – Discovery of new resources or depletion of existing ones shifts supply right or left respectively.
Equilibrium is the price-quantity pair where the supply curve and the demand curve intersect. At that price, every unit producers want to sell finds a willing buyer, and there is neither surplus nor shortage.
If the market price is above equilibrium, a surplus develops (quantity supplied exceeds quantity demanded), and price tends to fall.
If the market price is below equilibrium, a shortage develops (quantity demanded exceeds quantity supplied), and price tends to rise.
Price elasticity of demand:
E_d = \frac{\%\Delta Q_d}{\%\Delta P}Price elasticity of supply:
E_s = \frac{\%\Delta Q_s}{\%\Delta P}Income elasticity of demand:
E_I = \frac{\%\Delta Q_d}{\%\Delta I}Where Q_d is quantity demanded, Q_s is quantity supplied, P is price, and I is income. All elasticities are calculated holding other variables constant (ceteris paribus).
Key thresholds for price elasticity of demand: |E_d| > 1 is elastic (quantity responds more than proportionally to price), |E_d| < 1 is inelastic (quantity responds less than proportionally), and |E_d| = 1 is unit elastic.
Elasticity is how firms decide whether raising prices will increase or decrease total revenue. A petrol station in a rural area with no nearby competitors faces inelastic demand, so a small price increase barely dents sales volume and raises revenue. A coffee shop next door to three others faces elastic demand, so the same price increase sends customers elsewhere.
Supply-and-demand shifters explain real market events. A drought (weather) shifts the supply curve for grain left, raising food prices. A viral social-media trend (consumer preferences) shifts the demand curve for a product right, creating temporary shortages and price spikes.
Students often say "demand increased" when the price of a good rises and people buy less. That is a movement along the demand curve (a decrease in quantity demanded), not a shift of demand itself.
Nominal and real prices are frequently confused. A product that cost $5 in 1990 and $10 in 2024 has not necessarily become more expensive in real terms if general prices also doubled.
Students sometimes treat substitutes and complements as fixed categories. Whether two goods are substitutes or complements can depend on context: chicken and beef are substitutes at dinner, but complements in a mixed grill.
Equilibrium does not mean "fair" or "optimal." It simply means the market clears. The equilibrium price of essential medicine can still be unaffordable for many people.
⚠️ The distinction between a shift of a curve and a movement along a curve is one of the most commonly tested points in introductory and managerial economics. Expect at least one question requiring you to identify which is which.
⚠️ Elasticity calculations appear frequently. Be comfortable computing percentage changes and interpreting the resulting elasticity value (elastic vs. inelastic vs. unit elastic).
⚠️ Know the five demand shifters and five supply shifters cold. Exam questions often present a scenario (e.g. "a new regulation raises production costs") and ask you to predict the effect on equilibrium price and quantity.
⚠️ Positive vs. normative economics is a classic early-exam question. You will likely be asked to classify statements as one or the other.
True or false: "The government should raise the minimum wage" is a statement of positive economics.
Fill in the blank: A good with a price elasticity of demand equal to -0.3 is considered ________ (elastic / inelastic / unit elastic).
True or false: If the price of tea rises and consumers buy more coffee, tea and coffee are complements.
Fill in the blank: At market equilibrium, there is no ________ and no ________.
True or false: A rise in input prices shifts the supply curve to the right.
Answers: 1. False (it is normative). 2. Inelastic. 3. False (they are substitutes). 4. Surplus, shortage. 5. False (it shifts supply left).
Q: A new health study finds that drinking green tea reduces the risk of heart disease. What happens to the demand curve for green tea, and what happens to the equilibrium price and quantity?
A: The demand curve for green tea shifts to the right (consumer preferences change in favour of the good). Equilibrium price rises and equilibrium quantity rises.
Q: Suppose the price of steel (an input for car manufacturing) increases sharply. Explain the effect on the market for cars using supply-and-demand analysis.
A: Higher steel prices raise production costs for car manufacturers, shifting the supply curve for cars to the left. With demand unchanged, the equilibrium price of cars rises and the equilibrium quantity falls.
Q: The price elasticity of demand for a product is -2.5. If the firm raises its price by 10%, what happens to quantity demanded, and does total revenue increase or decrease?
A: Quantity demanded falls by 25% (10% x 2.5). Because demand is elastic (|E_d| > 1), the percentage drop in quantity exceeds the percentage rise in price, so total revenue decreases.
Q: Classify the following statement as positive or normative: "A 15% tariff on imported steel will raise domestic steel prices by approximately 8%."
A: Positive. It is a testable factual prediction about what will happen, not a judgement about whether the tariff should be imposed.
Q: Explain the difference between a movement along the demand curve and a shift of the demand curve. Give one example of each.
A: A movement along the demand curve occurs when the good's own price changes, causing quantity demanded to change (e.g. the price of coffee rises from $4 to $5, and consumers buy fewer cups). A shift of the demand curve occurs when a non-price factor changes the entire demand relationship (e.g. a population increase shifts the demand curve for housing to the right at every price level).
These foundational concepts feed directly into producer theory (production functions, cost curves) covered later in APEC 3002. Understanding how supply shifts will make cost-curve analysis intuitive.
Elasticity resurfaces when the course covers pricing strategy and market power. A firm with inelastic demand has more pricing power, which connects to monopoly and oligopoly analysis.
The positive-vs-normative distinction becomes important when the course moves to welfare economics and policy analysis, where you will need to separate factual predictions from value judgements about "good" outcomes.
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