Economic Principles and Decision Making

Running head: ECONOMIC PRINCIPLES AND DECISION MAKING
Economic Principles and Decision Making
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1ECONOMIC PRINCIPLES AND DECISION MAKING
Table of Contents
Problem A........................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................3
Problem B........................................................................................................................................4
Question 1....................................................................................................................................4
Question 2....................................................................................................................................5
Question 3....................................................................................................................................7
Question 4....................................................................................................................................7
Problem C........................................................................................................................................8
Question 1....................................................................................................................................8
Question 2....................................................................................................................................9
References......................................................................................................................................10

2ECONOMIC PRINCIPLES AND DECISION MAKING
Problem A
Question 1
The demand elasticity concept is one of the important areas of concern in the decision
making process of a business. Elasticity of demand measures relative responsiveness of demand
with respect to change in different factors determining demand. Sales volume of a business
changes with changes in demand, which in turn depends on changes in price of the good, income
of consumers and price of related goods (Cowell, 2018). Schemeckt Gut should consider
different form of elasticity such own price elasticity, income elasticity and cross price elasticity
before launching Basser energy bar in a new market.
Own price elasticity of demand measures percentage changes in quantity demanded of a
good for a percentage change in own price of the product. Depending on extent of change in
demand with respect to price, demand is considered elastic or inelastic. Elastic demand refers to
the state of demand where percentage change in demand exceeds that of the change in price. In
contrast, in case of inelastic demand, demand responds less than price. Pricing decision of a
company depends on degree of demand elasticity as revenue varies depending on elasticity. If
the company finds that demand for energy bar is relatively elastic in the market, then it should
enter the market with a low price (Cowen & Tabarrok, 2015) Low price in this case increases
revenue, by largely increasinfg demand. If demand of energy bar is relatively inelastic, then it is
profitable for the company to charge a high price as demand does not fall much even with high
price. Estimation of own price elasticity thus helps the company to take pricing decision.
Income elasticity of demand estimates extent of change in demand for a change in
income. It captures the tendency of people to change the demand of energy bar for a certain

3ECONOMIC PRINCIPLES AND DECISION MAKING
change in demand. If income elasticity of demand is positive and relatively then people tend to
increase the demand by larger proportion for an increase in income (Mochrie 2015). It is
therefore beneficial for the company to introduce Besser energy in a region where people
experience an increasing trend in income.
Another important form of price elasticity that the company should be taken into
consideration is cross price elasticity of demand. The measure of cross price elasticity indicates
whether Besser energy bar is substitute or complement to the available brand. Cross price
elasticity is positive for substitute goods while it is negative for complementary goods (Kolmar,
2017). If Besser energy bar seems to be substitute of available energy bars, then the company
should charge a relatively lower price for its energy bar.
Question 2
The research department of Schmeckt Gut should investigate on relative elasticity of
demand for Besser energy bar. Data needs to be collected to estimate demand elasticity for
respective changes in price, income and price of other competitor product. The trend data on
demand and related demand determining factor will give an idea of elasticity in the market. It is
profitable to enter the market where demand is relatively less elastic with respect to price and
relatively more elastic with respect to income (Jain & Ohri, 2015). A smaller positive value of
cross price elasticity indicates that change in price of competitor’s product has a relatively
smaller impact on demand for Besser energy bar. The smooth introduction of Besser energy bar
in the market requires appropriate data to measure elasticity and critical evaluation of the
estimated elasticity.