The marginal use value of the product under consideration determines the offer price demanders are ready to pay. The variable cost of the item or service being given determines the asking price providers are ready to accept. The primary causes of fluctuations in the equilibrium price of gasoline are price spikes and falls for crude oil inputs brought on by supply interruptions and gluts, rising demand from emerging nations, and speculation.
Price changes cause the demand curve to move along, but changes to any of the other demand function variables cause the demand curve as a whole to shift. Therefore, changes in price cause "changes in the amount demanded along" a certain demand curve. On the other hand, when one talks about "changes in demand," they mean changes to the entire demand curve. Changes in consumer income levels, the cost of substitute and complementary goods, the amount of advertising, competitor advertising spending, population, consumer preferences, the period of adjustment, taxes or subsidies, and price expectations are a few of the variables that can cause a shift in the entire demand curve.
A decision-maker must ascertain the additional (marginal) costs and additional (marginal) benefits connected to a proposed action according to the marginal analysis idea. The action should be conducted if the marginal advantages outweigh the marginal costs (i.e., if the net marginal benefits are positive).
The current value of anticipated future cash flows (returns) less the initial investment is the net present value of an investment. The contribution that an investment makes to the value of the company and, consequently, to the wealth of shareholders, is represented by its net present value. The return that investors (the company) expect from an investment determines its net present value, which in turn relies on how risky investors believe the venture to be.
Risk is the possibility for outcomes from a choice alternative to vary. It may be calculated using either the standard deviation (an exact risk indicator) or the coefficient of variation (a relative measure of risk). Risk and necessary rates of return are correlated positively. Greater-risk investments must have larger projected returns.
Your task
• Summarise the key learnings from this week's lessons. What are the points you really need to remember?
• Reflecting on what you have learned this week. What would you do again? What would you do differently?
Sample Solution