If a firm is able to properly calculate the price of a elasticity of demand for its products, it will be able to determine the market’s responsiveness, or sensitivity, to changes in price for a specific product and will allow the firm to more accurately forecast the effects on total revenue. Knowledge of elasticity can help a firm to project big-picture effects of raising or lowering products’ prices by predicting changes in market price on total industry sales and total consumer expenditures in the industry.
For example, if a sunglasses retailer is looking to increase their total revenues, they deed to determine how a change in the price of sunglasses will input the quantity of sunglasses demanded. If they increase the prices of sunglasses by 15% and demand is inelastic, then revenues would increase. The likelihood, however, off sunglasses being or becoming elastic is slim. For a sunglasses retailer to increase their total revenues, it would seem more plausible for the retailer to focus their business strategy on decreasing the prices of sunglasses in order to sell more units and increase consumer demand. . As a manager off steel mill, it is critical to consider certain economic indicators hen thinking about demand for steel products. Though steel is one of the world’s most widely traded commodities, the demand for steel products tends to be rather cyclical in nature. Demand for steel products often fluctuates based on demand of products and services offered by complementary industries such as manufacturing, automobile, development and construction, real estate, infrastructure companies.
Further, if a steel mill company has an international customer base, the mill would need to consider these economic factors in foreign markets as well as domestic markets and assess the overall end-product demand from these industries. For instance, if the mill maintains an international customer base, the mill should assess the current economic status and examine gross domestic product of each country to forecast demand. If the mill transacts with China, the largest producer and consumer of steel, it would behoove the mill to look at growth trends in the complementary industries in the Chinese market.
As well, the mill would need to identify factors affecting the price of steel in certain markets, which could include tariffs. Another factor for a mill to consider is the range of possible substitutes. The first range of substitutes consists of the other companies that produce steel. The steel industry is a niche-like industry where there are only a handful of competitors. The second range of substitutes considers other products on the market that could be used in place of steel. To varying degrees, aluminum, glass, cement, composites, plastic, and wood can acts as substitutes.
If steel is viewed by the market as elastic, allowing substitutes to exist, a lower price point to substitutes will result in decreased demand for steel and an increased demand of the substitutes. The mill will also need to consider current steel supply. Historically, the steel industry is categorized, in part, by overcapacity. If there is an excess supply of steel then prices will most likely drop, affecting total revenue. When this occurs, the company may want to halt production to decrease supply.
Also with respect to supply, the mill should consider the six major variables of supply and calculate a projection of the general supply function. For example, if the price off input raw material, such as iron ore, significantly increases, the cost of production will also increase. Conversely, if new technologies are implemented, it could increase the efficiency of production, thus lowering production costs. 3. Quantity supplied refers to the amount off good or service offered for sale during a given time period.
There are six key variables that can impact the quantity supplied: 1. Price of the good/service; 2. Price of inputs/raw materials used for production; 3. Price of goods related in production; 4. Level of available technology; 5. Expectations of producers concerning future prices of the good/service; and, 6. Number of firms or amount of productive capacity in the industry. The quantity supplied can be calculated mathematically through the general supply function which shows how these six variables Jointly determine quantity supplied.
For example if you increase the price of a good, which has a direct relation to the quantity supplied, producers would typically tend to increase production of the good. A quantitative measure of this change can be illustrated through the direct supply function. It is important to remember, however, that this is true so long as the remaining five variables hold constant. In another example, if the firm projects the rice of a good or service is likely to rise in the near future, they may halt current production or withhold some of the current supply in order to increase revenue in a future period. . Some goods and services can exhibit elastic and inelastic demand. An example of such a good/service would be college education in the United States. Typically, college education can be viewed as inelastic as it is increasingly seen as a social necessity. Increased college enrollment was observed over the past twenty years, particularly in the past decade or so. The National Center for Education Statistics ported that enrollment increased by 37 percent between 2000 and 2010.
Concurrently, the price of college tuition and required course material increased. So, as the price of the college education increased demand was not adversely impacted. In some respects, however, college education can be viewed as elastic as it is not a necessity to live and there are some other alternatives or substitutes. For example, some individuals may elect to enroll in a technical training or certification program, some may enlist in the services, and others may enter straight into the workforce to gain hands-on-experience.
To some extent, college education can be seen as luxury rather than a necessity The factors affecting the price elasticity of demand include the availability of possible substitutes, the percentage of the consumer’s budget, and the time period of adjustment. So in the example of the college education, there are several learning alternatives available. These alternatives or substitutes; however, may not be viewed by all persons as equal substitutes. With respect to the consumer’s budget, the greater the percentage of the consumer’s budget required for college education, the more elastic it can be viewed.
The cost of a college education can vary greatly depending upon available third-party assistance to help offset the cost, such as scholarships, grants, corporate tuition reimbursement, etc. The possibility for the availability of supplemental financing significantly reduces the cost and percentage of the consumer’s budget, thus making the price less elastic. In regards to the time period of adjustment, if there were drastic and immediate increases in price for college education, consumers may not react right away; however, over time it would be expected that they would opt for the alternatives. Inflation can simplistically be defined as the change in level of prices off group of commodities as a function in time. There are a few key factors that can create inflation in the US economy. One factor is the introduction or release of a stimulus whereby demand for goods and services increases. When there is increased demand or, more specifically, if there is excess demand, inflation can occur. Another related factor is demand-push inflation, which typically occurs when the state of the economy is well. For example, in a good economy consumers may be more likely to purchase cars.
If there is a significant increase in consumers purchasing cars, it is likely that car prices will increase. As this starts to happen, there is the long term threat of the devaluation of the currency, where over times, the value of the dollar holds less value than before. To somewhat mitigate the effects of devaluation, the fiscal policy should work to properly regulate taxation and spending to determine when and what changes need to be made in order to either speed-up or slow-down the economy. Another factor that can lead to inflation is the current monetary policy.
If the current logic calls for continued production and growth of the money supply, the money supply expands. Typically, the policy will expand in situations where there are higher rates of unemployment and the overall state of the economy is lagging. By expanding the money supply, interest rates tend to drop and there is more incentive for consumers and business to apply for or use credit. When making the decision to expand the supply it is important, however, not to let the increased supply distort and deteriorate the value of products and assets. 6.
Economic assumptions to substantiate that the US economy is improving can include positive trending of certain economic measures such as current unemployment rates, the GAP, levels of productivity, and consumer confidence levels. When there are reported increases in employment, thus reducing the unemployment rates, it creates the assumption that the economy is starting to pick up . This can misleading however, as it often depends on how the unemployment rate is calculated. If there was only one methodology to determine the current unemployment rate, there would be no way to manipulate the various sets of employment data currently available.
For example, if the Department of Labor wants to increase confidence in the labor market, they can choose certain data that is more mathematically conducive to arrive at a more positive reflection; and, although the data may not be false, it may not be the most accurate data to arrive at a more reflective employment rate of the current period. With respect to GAP, it is important to consider the following equation: Y = C + I + G. Gross domestic product is the overall market value of all final goods produced.
When any or all of the components (consumer spending, business investment, and overspent spending) that determine GAP increase, it helps increase the overall calculation. Often times increased GAP can be reflective of increased levels of productivity, which could be due to efficiencies in labor markets; increased consumer confidence where, though it is subjective, shows positive sentiments about the current economy; and, increased business investments, such as development of new office buildings or the investment on technology infrastructures.
Consumer confidence can be another economic assumption to indicate improvements in the economy. When confidence levels are high, consumers nearly have an optimistic outlook on the state of the current economy alongside their own personal financial situations. The higher the consumer confidence, the more apt consumers are to spend, circulating the funds into the economy. Consumer confidence can be threatened when unemployment increases and Job security is threatened.
As with unemployment rates, it is important to analyze the data that is used to calculate the consumer confidence level as there is no clear-cut methodology. For example and as discussed throughout our course, there was an increase in the nonuser confidence and a specific focus spoke to the optimal outlook with respect to the housing market. It is important to consider, however, that the period of time the consumer confidence was reporting on was during a seasonal period where historically the real estate market is most successful (spring months). . Movements along the demand curve occur only if there is a change in quantity demanded caused by a change in the good’s own price. Once a direct demand function is derived from a general demand function, a change in quantity demanded an be caused only by a change in price and whereby the other five demand principal variables remain constant. This is part of the law of demand which states that quantity demanded increases when prices fall and vice a versa.
Here it is important to recognize that the change is in quantity demanded, not in the demand. A shift in the demand curve, referred to as a change in demand, occurs only if a non- price determinant of demand changes. For example, if the price of a complement/ related goods were to increase or if there was a significant change in consumer sates whereby there was an adverse impact on demand, the demand curve would shift more to the left reflecting decreased demand.
Conversely, if these factors had a positive impact on demand, the curve would have a rightward shift. 8. A result of the Federal Reserves monetary policy being too stimulus is that it can expand the current supply of money and when the supply grows too quickly inflation can occur. When inflation rises and is not kept under control, eventually it can lead to the devaluation of money over time where the prices of goods/services rises but the consumer’s power decreases.
