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Calculating Price Elasticity Of Demand

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Question:

Discuss about the Calculating Price Elasticity of Demand.
 
 

Answer:

Introdcution:

Price elasticity of demand gives information to the seller about the possible reaction that the buyers will have upon a price change (Moffatt, 2017). This is very important therefore in deciding the price to charge for the goods produced. The topic of elasticity helps in understanding the nature of the good depending on the magnitude of demand. A good with a high demand even when the prices are high is considered price inelastic (Pettinger, 2017). Similarly, a good that demand is low when prices are high is considered price elastic. Elasticity helps the investor therefore in determining the changes that will occur to the revenues when they vary their prices. It is crucial for the Board of Schmeckt Gut to understand that raising the price does not always result in an increased revenue; it only happens when demand is inelastic to price. If the demand is elastic to price, even a price rise could result in a reduced revenue. The board should also understand that lowering prices may at sometimes increase the producer’s revenue; this is the case where demand is price elastic; this is because more consumers will demand the good.

In order to ensure that the introduction of Schmeckt Besser energy bar is smooth, the instructions the board should give the Schmeckt Gut Research Department are as follows. One is to determine the nature of the good which will determine the magnitude of need for this product. If the energy bar attests to be a necessity good, then the board should introduce the product at a higher price since demand will still be significant; otherwise it should be introduced at a lower price. The researchers should also identify the availability of close substitutes; if there are close substitutes, the energy bar will be price elastic and thus should be introduced at a lower price; otherwise it should be introduced at a higher price.  The price should be equal or lower than for the close substitutes if available to make it more attractive in the market.

Price ($ per Energy Bar)

Quantity Demanded (Thousands per Day)

PQ

1

30

30

1.5

25

37.5

2

20

40

2.5

15

37.5

3

10

30

$2 is the price that maximizes total revenue since it is giving the highest revenue of $40,000.

 

The relationship between the Energy bars from Schmeckt Gut and those from Fly High is for complementary goods. This is because the movement between the quantity demanded for Schmeckt Gut Energy bars and the price for Fly High Energy bars is on opposite directions (Arnold, 2015). This is represented by the negative sign of the cross-elasticity of demand.

The Schmeckt Besser energy bar could be smoothly introduced into the market by determining the nature of competition that exist in the market. Based on the argument that the Schmeckt is able to lower its prices so as to influence its quantity level, this makes this market an oligopoly. This is proved further by the influence of one price on the price of another producer. Further, we already confirm that this is not a perfectly competitive market because if it is, Schmeckt could not be concerned with the introduction price as it is already provided in the market. Thus, Schmeckt should understand how the players in the oligopoly markets influence the price and quantity level. This firm should also identify the target group and tailor its products according to this group so as to make the goods more competitive.

Schmeckt Gut Research Department specific tasks include the identification of the other players and analyze their characteristics such as price charged and their supply level. It should also have constant track on the strategy taken by the other players. This is important because any strategy taken by any single player will affect all the other players including Schmeckt.

 

References

Arnold, R. (2015). Microeconomics. South-Western: Cengage Learning.

Moffatt, M. (2017). A Primer on the Price Elasticity of Demand. ThoughtCo. Retrieved 21 October 2017, from https://www.thoughtco.com/price-elasticity-of-demand-overview-1146254.

Pettinger, T. (2017). Calculating Price Elasticity of Demand. Economicshelp.org. Retrieved 21 October 2017, from https://www.economicshelp.org/blog/195/economics/calculating-price-elasticity-of-demand/.

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