Assignment 2: Operations Decision

Running Head: DEMAND AND SUPPLY

DEMAND AND SUPPLY

DEMAND AND SUPPLY

Angel Pupo

Dr. Mohammad Sumadi

ECO 550; Managerial Economics & Globalization

October 19, 2017

Demand is the product quantity whether goods and services that the buyers are willing and able to buy while supply is the amount of product available in the market. The prices of the products are largely determined by the forces of demand and supply and how the forces interplay. (Rank, & Bernanke, 2007).

COMPUTING ELASTICITIES

The demand function is given as;

To find the quantity of product demanded we substitute the given values of the independent variables.

Price of the product = 500 cents per 3-pack unit

 Price of leading competitor’s product = 600cents per 3-pack unit I (in dollars)      =$5,500

A (in dollars)     =   Monthly advertising expenditures = $ 10,000

M=$5000

=17650 units

A).Price elasticity of demand

The price elasticity of demand is given by:

DQ/dP= -42, P = 500 and Q= 17650

= -42* 500/1765

==-1.1898

b).Cross elasticity of demand

This is given by: dQ/dP*Px/Q

DQ/dP = 20, PX = 600 and Qx =17650

Cross elasticity of demand = 20* 600/17650

Ec=0.679

c).Income elasticity of demand

Income elasticity of demand = dQ/ dI *I/Q

DB/did= 5.2

I=5500

Q= 17650

Therefore, income elasticity of demand = 5.2* 5500/17650

= 1.62

2. Implication of the elasticity in the short term and the long-term pricing strategies of the business

The price elasticity of demand

The price elasticity of demand for the 3-pack unit is -1.19. This implies that the demand is inelastic since the figure is negative. This means that small changes in price does not result to substantial change in in the quantity of product demanded.

The firm can apply the inelastic nature of demand in its pricing strategy. The company can increase the price of the product in the short term since it will not cause any considerable change in demand and also increase the product price by a percentage in the long-term which will lead to a small decline in the demand .By increasing the prices in the short and long term, the firm will reap profits as the small decline in demand will not affect its revenues.

The income price elasticity of demand for the product

The income elasticity is positive at 1.62 which implies that the product is a normal good since its demand is elastic implying that an increase in the consumers income level will result to an increase in the demand of the product. Because higher incomes increases the consumers purchasing power. If the consumers level of income is anticipated to increase in the short and long term, the firm can take advantage and increase the prices if the products. As indicated, the product is a normal good so its demand will not be affected by an increase in prices.

Cross elasticity of demand

The cross elasticity of demand measures the relations between the product and its competitor products. In this case the cross elasticity is positive at 0.679 which indicates the products are substitutes. This implies that an increases of the price of the product in the future whether short or long term may result to a decline in demand as consumers may switch to the competitor product. A decrease in price of the product will lead to an increase in demand hence an increases in the firm’s revenues (Rank, & Bernanke, 2007)

3. Recommendation of appropriate price changes to increase the market share

The price elasticity of the product demand is essential tool in the pricing strategy therefore the company should consider the inelastic nature the products demand and increase its prices in the short term to increase its sales revenue since as discussed above, an increases in the price will cause a less proportionate change in the quality demanded.

4).The demand curve.

Supply curve

b).The supply curve has a positive gradient as shown in the graph above.

c).The equilibrium price is given by the point of intersection of the supply and demand curve and in this case it’s about 400 cents per 3-pack units of the product while the quantity of product demanded is 22,500 units.

d) Significant factors affecting the supply and demand of the product.

(I) Factors affecting supply

Price; An increase in product prices influences the increase in quantity of the product supplied as suppliers seek to make more returns.

State of technology; Technological advancements increases the level and efficiency of productivity which reduces the cost of production enabling suppliers to produce and supply more to the market.

Cost of factors of Production; the cost incurred in acquiring production resources determine the cost of production so if the resources are readily available at affordable prices then there will be an increase in the supply of the product.

(ii).Factors affecting demand

Price; an increase in the price of the product results to a decrease in demand as consumers prefer cheaper and affordable prices while a decrease in the price will result to an increase in the demand as more consumers are willing and able to purchase the product. Customer’s tastes and preferences; if a product meets the consumers’ taste and preference, its demand increases, as more customers choose to consume the product.

Government policies; the directives and regulations issued by the government influence demand of a product in that if the government has imposed a ban on a certain product, then its demand decreases (Mankiw, 2004).

5. Rightward shifts and leftward shifts in demand curves

Demand curves

The level of income of consumers; Increase in the level of income causes the demand curve to shift to the right due to an increase in demand caused by an increase in the consumers purchasing power. A decrease in income level reduces the consumers’ purchasing power hence resulting to a decline in demand hence a shift to the left. Changes in the price of substitutes; Decrease in the price of alternative substitute will cause a rightward shift in demand curve while an increase in substitute prices will cause a leftward shift of the demand curve.

Changes in the prices of substitute goods and services; Decrease in price of a substitute good leads to a decline in the demand of the product as consumers switch to the cheaper product hence a shift to the left while an increases in the price of the substitute products causes a shift to the right.

Shifts in Supply curve

Technology advancement increases the level of productivity leading to an increase in supply hence the supply curve shifts to the right. Favorable production conditions such as good weather for agricultural products leads to an increase in supply hence a shift to the right while unconducive production conditions increase the cost of production reducing the quantity supplied thus the supply curve shifts to the left. The cost of factors of production determines the level of production hence the supply of goods and services. If the factors of production are available at affordable prices the supply of the product will increase causing the supply curve to shift to the right while high cost of factors of production reduces the quantity of product supplied hence a shift to the left (Mankiw,2004).

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References

Economicshelp.org, (2014). Factors Affecting Demand | Economics Help. Retrieved 06 October 2017, from http://www.economicshelp.org/microessays/equilibrium/demand/

Khan Academy, (2014). Factors affecting supply. Retrieved 06 October, 2017, from https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/supply-curve-tutorial/v/factors-affecting-supply

Mankiw, N. (2004). Principles of microeconomics (1st Ed.). Mason, Ohio: Thomson/South-Western.

Rank, R., Bernanke, B., & Frank, R. (2007). Principles of microeconomics (1st Ed.). Boston: McGraw-Hill/Irwin

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Quantity demanded

Price

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