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Friday, 24 April 2015

PRODUCTION MANAGEMENT- DEMAND THEORY




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QUESTIONS AND ANSWERS:
1.      Distinguish between a demand function and a demand curve.  What relationship is indicted by a shift in a demand curve?

Answer:
Demand Functions: can be specified either for an entire industry or for an individual firm.  Somewhat different independent variable would typically be used in industry, as compared to firm, demand equations with perhaps the most important difference being the fact that variables representing competitors’ actions would be stressed in firm demand functions.  For example, in a firm’s demand function, the price charged by competing firms and a second advertising variable measuring competitor’s advertising expenditures might be included.


Demand for the firm’s product would be negatively related to its own price, but positively related to the price charged by competing firms.  Similarly, demand for its products would be positively related to its own advertising expenditures, but would be probably decrease with additional advertising by other firms.  Since firm and industry demand functions differ, different models or equations must be specified for estimating the tow kinds of demand.  However, this matter need not concern us in this chapter, because the demand relationships developed here are applicable to both firm and industry demand functions.

The Demand Curve
The demand curve function specifies the relationship between quantity demanded and all the variables that determine demand. The demand curve is that part of the demand function which expresses the relation between the price charged for a product and the quantity demanded, holding constant the effects of all other independent variables. 

2.         What is the acceleration principle? How is it related to each of the following:
            i. Derived demand
            ii. Capacity
            iii. Technological stability
Answer:
HOW ACCELERATION PRINCIPLE RELATED TO DERIVED DEMAND, CAPACITY AND TECHNOLOGICAL STABILITY
This notion of derived demand for producers’ goods leads to the economic concept known as the acceleration principle, which states that, when the demand for a final goods increases, the demand for the relevant producers, good will increase at a faster rate.  The same relationship holds for downturns in the demand for producers’ goods they are often much greater than the decline in demand for the final product.
The acceleration principle is best known in business analysis and macro economics where the impact of a change in consumption of business inventories often causes investment to fall and precipitate a decline in economic activity.  The acceleration principle helps to explain one very important fact of economic life; that capital goods industries experience much greater cyclical fluctuations than consumer goods industries.  This obviously has important implications for business firms manufacturing capital equipment and for communities whose economic base is largely the manufacture of capital goods.
The acceleration principle is an important tool for examining the derived demand for capital goods.  As with most theoretical constructs, however, it has empirical limitations. First, the accelerator effects, will take place only if the original output of the final product made full use of the available capacity. 
Second, the acceleration principle reflects only one kind of stimulus for demand of producers’ goods, the stimulus of increased demand for the final product is viewed as more than just a temporary fluctuation.

References:
Nathaniel C. O.  (2002 -2010), Production Management Concepts and Cases, Enugu: Precision Publishers Limited.

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