Nicholas Barton
00343164
Financial Management
PRT 5395 – 001
Application 1 – Basic Economic Principles
01. Supply: The quantity of a product or resource that the owner is willing to offer or make available
at a given price
Demand: The amount of a product or resource wanted at a given price
Supply and Demand
$250.00
$200.00
$150.00
Price $
Supply
$100.00
Demand
$50.00
$0
50
100
150
200
250
Quantity
Above is scatter plot representing an example of a supply and demand curve. The Price of an
item is given along the Y-axis and the Quantity is represented along the X-axis. The data points
at which price and quantity meet make up the supply and demand curves. The blue line that is
trending upward represents the supply curve, or in other words a graphical representation of a
set of values that represent the quantity of a product or resource that the owner is will to make
available at a given price. The owner would only make 75 units available for sale at a price of
$100 but at a price of $200 per unit he would be willing to offer 200 units. Similarly the
downward trending red line is a graphical representation of the quantity of a product or
resource wanted or “demanded” at a given price. For example at $200 dollars per unit the
market would only demand 75 units, but if the product were to be made available to the market
at a price of $100 per unit then the market would want 200 units. The point of intersection at
125 units at a price of $125 is the equilibrium point at which supply and demand meet. In a
perfect, theoretical sense this would yield the most efficient number of units to produce and the
price to sell those units at in order to maximize production and minimize price to a point that
perfectly meets demand.
a. A circumstance under which demand for a yak butter sculpture class would shift the
demand curve to the left would be if another Jedi master opened up a yack butter
sculpting studio next door and offered classes as well. Fewer spaces, a shift to the left,
would be requested at the asking price because there would now be more spaces in the
market as a whole because of the new studio next door.
b. A shift of the demand curve to the right could be caused by a perception of scarcity in
the market. If Yoda in fact has the only studio in town and suddenly Oprah promotes the
psychological benefits of yak butter sculpture class, the demand for seats in the class
will shift right, as Yoda has the only seats in town more people will demand the same
number of available seats.
c. A shift in the supply curve to the left could be caused by a reduced production capacity,
in this case if Yoda needed to install a new cooler to keep his yak butter fresh the cooler
might take up space normally used by students. By reducing the capacity of our
operation a leftward shift in the supply curve would occur as the number of potential
students in each class would decrease as a whole.
d. Conversely a shift to the right for the supply curve might be achieved through expansion
if the operation. If they were to expand into the space next door in order to provide
more seats in the classes the supply curve would shift to the right, as more spaces (the
supply) would become available.
02. Spa Memberships
Supply is 200 @ $100 then 135 @ $50; Demand is 65 @ $100 and 100 @ $50
Shown Graphically…
$120.00
$100.00
$80.00
$60.00
Supply
$40.00
Demand
$20.00
$0
50
100
150
200
250
Because there is no clear intersection of the supply and demand curves in our graph, we can use
the algebraic method to solve for a point of intersection. The formula for supply and demand is
below.
𝑦 = 𝑎𝑥 + 𝑏
We begin by calculating the slope of both the demand curve and the supply curve
50 − 100
50
= (−
) = .77
135 − 200
−65
50 − 100
50
=−
= −1.43
100 − 65
35
We then use our newly found slope (m) and plug it into our equation using known data points
for x and y; solving algebraically for “b” gives us the mathematical constant to construct the
formula for our supply and demand curves.
100 = .77(200) + 𝑏
100 = 154 + 𝑏
−154 = −154
−54 = 𝑏
𝑦 = .77𝑥 − 54
100 = −1.43(65) + 𝑏
100 = −92.95 + 𝑏
+92.95 = +92.95
192.95 = 𝑏
𝑦 = −1.43𝑥 + 192.95
By setting the equations equal to one another and solving for x we can determine the number of
units at which the supply and demand curve meet.
. 77𝑥 − 54 = −1.43𝑥 + 192.25
+1.43𝑥 + 54 = 1.43𝑥 + 54
2.2𝑥 246.95
=
2.2
2.2
𝑥 = 112.25 𝑜𝑟 113 𝑢𝑛𝑖𝑡𝑠
By plugging this equation into either original formula we can solve for the equilibrium point for
price.
𝑦 = .77(113𝑢𝑛𝑖𝑡𝑠) − 54
87.01 − 54 = 33.01
𝑦 = $33.01
According to these data points we overestimated the selling price of our memberships
significantly. Had we charged $33 for each membership we would have sold 113 units, this
maximizing the equilibrium for both supply and demand.
03. Fleet Replacement
We are calculating interest on savings in order to determine whether or not we will be able to
afford to replace our fleet of kayaks in four years to the tune of $70,000. Will setting aside
$15,000 a year for the next four years earn enough interest to afford the $70,000 total cost of
the fleet? I have created a table below illustrating the different amounts of money that would
be earned in interest over each of the four years; this is based on a 6% interest rate.
Year # of Years Invested
1
(for 4)
2
(for 3)
3
(for 2)
4
(for 1)
Amount
$15,000.00
$15,000.00
$15,000.00
$15,000.00
Rate
6%
6%
6%
6%
Table Value
1.262
1.191
1.124
1.06
Total
Value at year end
$
18,930.00
$
17,865.00
$
16,860.00
$
15,900.00
$
69,555.00
Investing $15,000 each year will not be enough money saved to cover the cost of replacing your
fleet as the combined savings and interest will only generate $69,555 in funds. As far as a
recommendation is concerned there are different ways one could approach the problem.
According to the Time Value of Money principle, if we were to leave the money in the bank
longer it would earn more interest and enable us to replace our fleet, this would require
extending our timetable for replacement and may not comply with the environmental
preservation standard. We could also negotiate a better interest rate, by increasing the rate to
even 7% we would be more than able to afford the boats after four years; as illustrated here
Year # of Years Invested
1
(for 4)
2
(for 3)
3
(for 2)
4
(for 1)
Amount
$15,000.00
$15,000.00
$15,000.00
$15,000.00
Rate
7%
7%
7%
7%
Table Value
1.311
1.225
1.145
1.07
Total
Value at year end
$
19,665.00
$
18,375.00
$
17,175.00
$
16,050.00
$
71,265.00
We could even use $445 of our own money to finance the project; however in the event we are
unable to use these tasks we can use a similar interest table to calculate the future value of a
dollar, leading to the next question…
04. Future Value of a Dollar
In order to determine how much money we need to invest now to have enough at the end of
the four year period we consult the future values table. The constant for a four year period at a
6% interest rate is 0.792; therefore we calculate the value thusly
$70,000(0.792) = $55,440
So, if we had $55,440 to invest right now the interest we could earn at 6% would enable us to
replace the fleet for $70,000 after four years; therefore our wealthy benefactor should write us
a check for $55,440 in order to finance the fleet investment.
05. Depreciation
Being that our company is new to the kayaking sector we are going to set the precedent for
watercraft depreciation using the declining balance method of depreciation. It is difficult to
anticipate useful life of our boats and even how often they will be used without any historical
values. Therefore we are hoping that the boats will retain some re-sale value at the end of their
useful life, declining balance method will allow us to do this. The equation for the declining
balance method is as follows
𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒
(𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒) = (𝐷𝑒𝑝. $ 𝑝𝑒𝑟 𝑌𝑟. )
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
Therefore with a beginning book value of $70,000 for the boats, using declining balance
depreciation, at a rate of 150% for three years gives us the following values
Year
1
2
3
Rate
1.5
1.5
1.5
Book Value
$ 70,000.00
$ 35,000.00
$ 17,500.00
$ Depreciated New Book Value
$
35,000.00 $
35,000.00
$
17,500.00 $
17,500.00
$
8,750.00 $
8,750.00
Beginning with $70,000 divided by 3, the number of years of useful life and multiplying that
figure by 1.5 we see that half of the value of the boats is depreciated in the first year alone. This
is helpful in that the boats could be damaged beyond repair at any given time, so it is best to
depreciate them more rapidly early on. At the end of three years we could sell the boats or
donate them to a charitable organization for $8,750 and not have to pay additional taxes on
capital gains. For the purposes of showing my work I have included a table of equations used to
calculate the depreciation over subsequent years.
70,000
(
) ∗ (1.5) = 35000
3
35000
(
) ∗ (1.5) = 17500
3
17500
(
) ∗ (1.5) = 8750
3
06. Trends
Trends are by definition a line. They are multiple points of data that are compiled and compared
in order to visualize the changing curves in demand; trend lines with positive slope are “upward
trends” where trend lines with negative slope are downward trends. Over three different
sampling periods the quantities increased in response to an increasingly popular trend; the black
trend line overlaying the data shows this concept. As the trend goes through the product life
cycle, quantities fall off after the third period and a negative trend line represents a downward
trend or a decreasing demand for a good or service. Trends are important to making financial
management decisions because we as managers can examine trend lines to determine whether
interest and thus demand for a certain product or service will grow or decline in the future.
Trends can be seasonal or have many other factors that drive them, being current on trends
allows decision makers to maximize their production capacity based on what demand will be
rather than what it is currently. Downward trends would often signify a need to move away
from certain operations in order to make the most efficient use of company resources. Below I
have included a graph illustrating this idea.
Trends
80
70
60
50
Quantity
40
2 per. Mov. Avg.
(Quantity)
30
20
10
Q1
Q2
Q3
Q4
Q5