Peer Review business proposal

Business Proposal

Matthew De Point

Business Proposal

Thomas Money has been in business since 1940. The company started out as a consumer finance but branch out into equipment financing and started a subsidiary Future Growth Inc. (FGI). The company made a move in 1951 and purchased an equipment manufacturing company and have continuously increased profits year after year. But the global downturn has hit the company and profits declined about 30% from previous year. The housing market was hit with the big drop, but there is some section how still have demand like hospitals and nursing homes. This analysis will look into the market structure and the elasticity of demand for the goods. There will be suggestion about pricing strategy and look into revenues and cost. There will be suggestion about non-price barriers and how the company can different their product to generate more income.

Market structure

In the monopolistic competition each seller monopoly in a particular product but nevertheless in competition because others are selling similar products, but not quite like. Monopolistic competition is very common. “The equilibrium in a monopolistic ally competitive market differs from the perfect competition in that each firm has excess capacity, and each firm charges a price above marginal cost” (Mankiw & Taylor, 2011). Each company sets MR = MC. However, free access makes it more to P = AC. Which means that profits will be zero.

Production, however, will not be effective because companies produce output were AC, which has not reached a minimum low. (Mankiw & Taylor, 2011).“But the monopolistic competitor’s control over price is quite limited since there are numerous potential substitutes for its product (McConnell 224).

“As new firms enter the market, demand for the existing firm’s products becomes more elastic and the demand curve shifts to the left, driving down price. Eventually, all super-normal profits are eroded away” (Economics Online, n.d.). For companies how operate on the monopolistic competition market demand is relatively elastic. "However, demand is not perfectly elastic because the output of each firm is slightly different from that of other firms" (Economics Online, n.d.).

Elasticity for the product

Price elasticity is percent change in volume divided by the percent change in price. If elasticity is close to 0 then demand is said to be completely inelastic, which means that consumer demand is virtually unchanged with the price change (McConnell, Brue, & Flynn, 2009). If the value is between 0 and 1 the demand is said to be inelastic. Consumers respond comparatively fewer price changes and sellers can increase their income by increasing price. If the elasticity is = 1 then elasticity neutral and price change has no overall effect (McConnell, Brue, & Flynn, 2009). If the value is> 1, then responds to demand proportionally more than the price changes and the price elasticity of demand is said or the demand is sensitive price changes (McConnell, Brue, & Flynn, 2009)

Elasticity measures the response of buyers and sellers of market changes and is useful to examine the supply and demand better. If demand for the product is elastic price reductions will increase revenue but if demand for a product is elastic price increase will reduce total revenue. If demand for the product is inelastic price reductions will reduce the total revenue and if demand for the product is inelastic than price increase will increase total revenue. For this scenario the highest price elastic is when the demand for product is 350. As was stated here above if elasticity is greater than 1, then the demand is called elastic, so if the demand for the product is elastic then reduce in price will increase revenue. The elastic is highest in demand for 350 pieces of forestry equipment selling at 1634,3 dollars. The company would be getting 92.3% more demand on their product by reducing the price for 5,6%.

Pricing strategy based on market factors. Pricing strategies are considered to be the main competitive strategy every business must exploit (Economics Online, n.d.). The company need to understand the market and strategize according to its demand and income level. The chart above shows us the demand on the market for certain prices. As the chart for total revenue shows, the company would be getting most revenues by selling their equipment at the 350 in demand as it would generate 572.005 in revenue.

How will changes in the quantity decisions affect marginal cost and marginal revenue. If companies have both marginal revenue and marginal cost is easy to see whether the company should increase or decrease the amount produced. If marginal revenue exceeds marginal cost, they should increase production, increased production will generate more revenue growth than the increase in costs.

If marginal revenue, however, is lower than the marginal cost companies should reduce production because income will indeed decline but with the cost will decrease more. This leads to that the maximum profit will not be in place unless marginal revenue is equal marginal cost. (McConnell, Brue, & Flynn, 2009). For Thomas Money Service Inc. this place that is at 12 pieces output as the chart above displays.

Created non-price barriers to entry based on market factors. The sale has dropped 30% from the previous year and the market for new hoses doesn’t look good but there is believed to be a demand for hospitals and nursing homes. Because of the profit in the company has decline they need to turn the table and hit the market where he is booming. In monopolistic competition market to increase profits the best way is to use advertising to stimulate sales and change the characteristics of the product, for example, appearance or packing (McConnell, 2009). When each company on the market sells different products and charge prices that are higher than marginal cost, must be a great incentive to advertise to attract more buyers. Because of this company need trying to use advertising to create a certain brand. Because FGI has been on this market for 64 year people know the product and recognize the brand. They need to inform the market that they have a product that people trust and that is their differentiated from others. “The goal of product differentiation and advertising so-called non-price competition is to make price less of a factor in consumer purchases and make product differences a greater factor. If successful, the firm's demand curve will shift to the right and will become less elastic“ (McConnell, 224).

It is essential to realize that customers are not buy the product in an actual sense but solutions to the needs that the product meets. That’s what this product will give them, product that people have trust for long time and that is theirs differentiation in the market that is theirs brand name will give them the differentiation that they need from rivals’ products (McConnell, 2009).

Changes in business operations alter the mix of fixed and variable costs. The change in the business operation by produce output of 12 pieces will generate them the most revenue. Even though the variable cost is highest for the company with this business operation, it will still generate the greatest revenue.

When the company is producing this output the MC and MR are as close to each other so the company is generating as much profit as it possible Because of the high fixed cost the company has that is 990 though they will output 12 pieces when dividing the cost to each item it would still give them the greatest profit to have an output of 12.

Conclusion

FGI has for the first time in the history of the company suffer loss. The company needs to realize where they can do better in the service of their customer and marketing achieved considerable benefits inherent in a clearer vision of the direction and future. Differentiation of product they are offering is essential and they need to focus on that. They need to know where the company is generating the most profit in the production, but that is the amount were MC=MR or as close to each other as possible. FGI also will be successful again knowing how elastic the product is and how a change in price effect the demand. They need to know the market factors and arrange their pricing according to the market to be able to generate more income so the wheel of fortune will begin to turn again.

References

Economics Online. (n.d.). Monopolistic competition. Retrieved from http://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html

Mankiw, N. G., & Taylor, M. P. (2011). Economics (2nd Ed.). London: Cengage Learning.

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics. Principles, Problems, and Policies (18th Ed.). New York, NY: McGraw-Hill Company.