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ECON6000 Economic Principles And Decision Making

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  • Course Code: ECON6000
  • University: Laureate International Universities
  • Country: United States

Question:

1. Interpret and successfully apply economic concepts of supply and demand for effective organisational problem solving.
 
2. Apply quantitative methods to forecast complex business variables including demand, supply, production and costs.
 
3. Critically analyse production processes and cost functions and classify the main forms of market structures as well as recommend appropriate pricing and strategies.
 
4. Critically evaluate the role and impact of various forms of government intervention in the economy including the implications of competition and deregulation policy for managerial practices.
 
 

Answer:

Introduction:

The aspect of demand elasticity is one of the crucial aspects in decision making of any business. Demand elasticity indicates the extent of change in demand proportion following a change in different demand determining factors. Demand and hence sales of a business responds the most for a change in own price of the product, income level of buyers and price of its competitor’s product (Carbaugh, 2016). The different type of elasticities named as price elasticity, income elasticity and cross price elasticity are important for Schmeckt Gut while introducing Basser energy bars in the market

The own price elasticity stands as a measure to capture proportionate change in demand for a corresponding change in price. Based of relative responsiveness of demand, demand is classified as elastic, inelastic and unitary elastic demand. For a relatively elastic demand the proportionate change in demand is greater than change in price. Reverse is the case for a relatively inelastic demand. Demand here adjusted less in response to price. If the change in demand is exactly same as the change in price, then demand is unitary elastic in nature. The nature of demand elasticity plays an important role in pricing decision through its impact on revenue (Hammock & Mixon, 2016). If the company observes that the energy bar is relatively elastic in nature, then it should charge a low price as this will increase revenue of the company. If demand is found to be relatively inelastic in nature, then the company benefits from increasing its price. Therefore, the own price elasticity of demand helps the company to determine price of the energy bar.

Income elasticity measures the responsiveness of demand with respect to income. This will help the company to learn about people’s tendency to change their demand of energy bars when income changes. If demand is relatively income elastic in nature, then this means people have a greater preference for energy bars (Carbaugh, 2016). Intriduction of Besser energy bar in such a market is obviously beneficial for the company.

The most important elasticity measure to be considered is the measure of cross price elasticity. The new Besser energy bars can be either complementary or substitute of the already existing energy bars. If it is introduced as a complementary product, then demand of the energy bars moves in opposite direction of price of already existing bars. The cross price elasticity is negative here (Gillespie, 2014). On the other hand, if the newly introduced bar appears as a substitute of its own energy bar or competitor like Fly High’s energy bars then cross price elasticity is positive. This implies the price of competitor product and its own demand will move in the same direction.

The Research department needs to collect information of respective elasticity measures of energy bars in the market. The estimation of elasticity requires sufficient information regarding change in demand with respect to change in own price, income of local people and price of the competitors’ product. The historical data on changes of demand for respective changes of these indicators are required to be collected to have an idea in the market. The product can be smoothly introduced in a market where demand is relatively less price elastic and relatively more income elastic (Stoneman, Bartoloni & Baussola, 2018). A lower value of cross price elasticity means Besser energy bar is relatively less affected by changes in price of the complementary or substitute good which is a positive sign for the business. The Board should crucially evaluate the elasticity measures of the concerned product in order to introduce the new energy bar without much hurdles.

Price ($per energy bars)

Quantity Demanded (thousand per day)

Revenue

1.00

30

30.00

1.50

25

37.50

2.00

20

40.00

2.50

15

37.50

3.00

10

30.00

Total revenue is obtained as price times quantity demanded (Fine, 2016). The above table shows revenue of Schmeckt Gut at different prices. The maximum revenue for the company is $40.00. The maximum revenue is obtained at price $2.00.

When price increases from $1.00 to $2.00 then demand decreases from 30 to 20.

When price of energy bar is $1.50, quantity demanded of energy bar is 25

A decrease in price from $3.00 to $2.00 leads to an increase in energy bars sold from 10 to 20. Consequently, the decline in price by Schmeckt Gut lead to a reduction in quantity of energy bars sold from 11 to 9.

 

Cross price elasticity of demand for Fly High’s energy bars with respect to price of Schmeckt Gut Energy Bar’s price is

Whether two products are substitutes, complementary or independent that can be understood by estimating the cross price elasticity between the two products. For complementary goods, a decrease in price of one good would lead to an increase in demand for the product as well as demand for the complementary good (Baumol & Blinder, 2015). The cross price elasticity in this case is negative. For substitute goods, a decline in price of one good leads to an increases in its own demand while reducing the demand for the substitute good. The cross price elasticity in this case is positive. A cross-price-elasticity measure of zero implies no relation between the two goods (McKenzie & Lee, 2016). The computed cross price elasticity of demand for Fly High with respect to price of Schmeckt Gut is 0.50. This means Schmeckt Gut’s energy Bar and Fly High Energy Bars are substitute goods.

Entering in a new market requires suitable strategy planning by the company. The strategy to enter in the new market depends on the specific structure of the market. The company can face three possible market structures – the perfectly competitive market, the monopolistic market and Imperfect market situations. The imperfectly competitive market can be of different types. The two major forms of imperfectly competitive market are oligopoly and monopolistic competition. Introduction in the different form of market is subject to presence of the competitors and other related features (Rader, 2014). A perfectly competitive market is defined as one where numerous buyers and sellers are present in the marketplace. Here, the company faces many competitors rather than only one or two competitors. In this form of market, each sellers enjoy only a small market share. Hence, behavior of one single seller in the market does not make a big difference. In the competitive market, the company can easily enter, as there is no restriction for entry or exit in the market (Cowen & Tabarrok, 2015). If the company is attempting to introduce its product to a market already having same kind of energy bars and many existing competitors, then the market structure is competitive and then the company can make a smooth entry in the market.  One extreme form of market structure is monopoly market. The Monopoly market is characterized as having a single seller and many buyers. This is the case where Schemeckt Gut’s own gym is the only gym center in an area where it can supply energy bars. Being the single seller in the market firms need not bother about is competitor and hence, an easily introduce any new products. Entering in an imperfectly competitive market with a significant market share is usually difficult and need suitable strategy planning (Hill & Schiller, 2015). This is because as the company tries to enter in the market its rivals retaliates by taking some strategy.

The company generally faces an imperfectly competitive market structure. That is the market structure is either monopolistically competitive or oligopoly in nature. In a monopolistically competitive market, there are different competing brands selling a differentiated product. Like competitive market, there are intense competition among the existing brands. Each brand has a monopoly power over its own brand and takes decision regarding its own brand. Only a few large sellers however dominate the oligopoly market. Entering in both the market requires extreme differentiation of their product (Carlton & Perloff, 2015). In order to ensure a smooth entry in the market the company should make its energy bars different from the already existing energy bars in the market. Today, energy bar market is growing at a rapid rate. With increase in disposable income, people have become increasingly health conscious. The company should introduce its Besser energy bar with some added features to enter successfully in a market.

Before entering in a new market, the research team of Schmeckt Gut should conduct specific research to identify the market structure. The first task is to find out the number of existing competitors and customer base of the market. These two vital things need to be known to determine the specific market structure. Market with many buyers and sellers define a competitive market structure (Feng, Morgan & Rego, 2017). Market with one seller and many buyers indicate a monopoly market. After researching on presence of buyers and sellers in the market, the company should research on type of existing product, strategy of its rival and concentration ratio in the market to identify correctly the market structure.

 

Reference list 

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Carbaugh, B. (2016). College Textbook Publishing: Three Microeconomic Applications. The American Economist, 61(2), 191-203.

Carlton, D. W., & Perloff, J. M. (2015). Modern industrial organization. Pearson Higher Ed.

Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave Macmillan.

Feng, H., Morgan, N. A., & Rego, L. L. (2017). Firm capabilities and growth: the moderating role of market conditions. Journal of the Academy of Marketing Science, 45(1), 76-92.

Fine, B. (2016). Microeconomics. University of Chicago Press Economics Books.

Gillespie, A. (2014). Foundations of economics. Oxford University Press.

Hammock, M. R., & Mixon, J. W. (2016). Microeconomic Theory and Computation. Springer-Verlag New York.

Hill, C., & Schiller, B. (2015). The Micro Economy Today. McGraw-Hill Higher Education.

McKenzie, R. B., & Lee, D. R. (2016). Microeconomics for MBAs. Cambridge University Press.

Rader, T. (2014). Theory of microeconomics. Academic Press.

Stoneman, P., Bartoloni, E., & Baussola, M. (2018). The Microeconomics of Product Innovation. Oxford University Press.

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