Economic Principles and Decision Making: A Case Study of Schmeckt Gut Energy Bars

This case study analyzes the economic principles and decision-making processes involved in the launch of a new energy bar, Schmeckt Besser, by the company Schmeckt Gut. It explores the importance of elasticity concepts, including price elasticity of demand, cross-price elasticity of demand, and their implications for pricing strategies and market analysis. The study also examines different market structures, such as perfect competition, monopoly, monopolistic competition, and oligopoly, and their relevance to the energy bar industry. Finally, it provides suggestions for the Schmeckt Gut Research Department regarding market research analysis and the smooth introduction of the new product.

Economic Principles and Decision Making
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Contents
Problem A...................................................................................................................................................3
1) Explain importance of Elasticities for this undertaking...................................................................3
2) Provide suggestions to the board to ensure the smooth introduction of the Schmeckt Besser
Energy Bar...............................................................................................................................................4
Problem B....................................................................................................................................................6
1. What is the price that will maximize the total revenue of Schmeckt Gut and what is the price
elasticity of demand at this price.............................................................................................................6
2. A. What is the price elasticity of demand when the price of Schmeckt Gut Energy Bar increases
from $1 to $2...........................................................................................................................................8
B. What is the price elasticity of demand when the price of Schmeckt Gut Energy Bar is $ 1.50...........9
3. Calculate cross price elasticity of demand for Fly High’s Energy bars sold with respect to the price
of Schmeckt Gut Energy Bar.................................................................................................................10
4. Investigate whether the Schmeckt Gut Energy Bar and Fly High’s Energy bars are complementary
goods, substitute goods or there is no relation between the two............................................................11
Problem C..................................................................................................................................................13
1. Provide suggestions to ensure the smooth introduction of the Schmeckt Besser energy Bar related
to the different market structures and identify the market structure for energy bars..............................13
2. Can you think of the specific task for the Schmeckt Gut Research Department in reference to a
market research analysis........................................................................................................................17
References.................................................................................................................................................18
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3

Problem A
1) Explain importance of Elasticities for this undertaking.
The elasticity of demand will provide the various advantages to the Board of Schmeckt Gut
which is explained as follows:
Determination of price policy:
The determination of the price can be done by the Schmeckt Gut which will be done through the
elasticity of demand for the particular product (Suleiman, et. al., 2012). This is important as by
lowering the price of the product will increase the demand and thus the profit of the organization
will increase. There will be increase in demand in less proportionate with fall in price therefore
the profits will be less and revenues will also decrease. If there is inelastic demand then the
higher price will be fixed by the producer and the elastic demand will fix the lower price
(Suleiman, et. al., 2012).
Shifting of Tax Burden:
The producer can shift the burden of the taxes which are indirect to the buyers by increasing the
price of the product which is dependent upon degree of elasticity of demand (Bass, 2018). When
there will be the elastic demand so the burden will be on the producer and if there will be the
inelastic demand then the burden will increase on buyers by increasing the price of product
(Baumeister and Peersman, 2013).
Help in international trade:
The Schmeckt Gut will get benefit from the international trade when the price of the exports are
fixed at the lower price for which the demand is elastic and the price will be high whose demand
is inelastic. This is important as the trade between the two of the countries is dependent upon the
elasticity of demand based upon the exports and imports of the two countries. The demand is
elastic means that the trade will benefit the seller country (Bass, 2018).
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So, these are the importance for the Board to calculate the elasticity of demand for the particular
product (Bass, 2018).
2) Provide suggestions to the board to ensure the smooth introduction of the Schmeckt
Besser Energy Bar.
To introduce the new product Schmeckt Besser energy bar it is suggested to the Schmeckt gut
research department to look upon the demand and the supply of the product (Dineshbakshi,
2018). The demand is the amount that the customer is willing to pay for purchase of the
particular product and the supply can be defined and the total amount of the goods as well as the
services that are available to the customers (Bennett, et. al., 2012). For the introduction it is
necessary to keep the price of the product according to the price of the Fly High who is the
competitor so that the supply of the goods can be increased and the equilibrium point has to be
set by the producer so that the best possible price for the product can be determined. The point
where the amount of supply interacts the demand is called the point of equilibrium
(Dineshbakshi, 2018).
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Image: Equilibrium Point
Source: Dineshbakshi, 2018
With this the opportunity cost of the product also plays the key role while determining the price
it can be explained through the production possibility curve which shows that how much the one
product has to sacrifice so as to obtain the other product (Dineshbakshi, 2018). So, the goods
which will have the few substitute those will be higher inelastic and the price elasticity with
more substitute will have the high elastic. So, it can be said that the Schmeckt Besser energy bar
does not have much substitute so it can be said that the demand for the product will be more
inelastic than the elasticity of the product (Dineshbakshi, 2018).
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Problem B
1. What is the price that will maximize the total revenue of Schmeckt Gut and what is
the price elasticity of demand at this price.
Price Quantity
Demanded
Revenu
e
1 30 30
1.5 25 37.5
2 20 40
2.5 15 37.5
3 10 30
30 25 20 15 10
0
5
10
15
20
25
30
35
40
45
Price
Revenue
It can be seen from the above graph that the price at which the total revenue will be maximum is
the $2 where the quantity demanded for the product is 20 units (Meng, et. al., 2014). So, the
price elasticity of the demand at that price is as follows:
Price Quantity Demanded
1.50 25
2 20
Change in price=2-1.5
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=0.5
Change in quantity demanded= 20-25
=-5
Price elasticity of demand = % change in quantity demanded/ % change in price
=5/0.5
=10
So, when the price is $2 the elasticity of demand is 10.
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2. A. What is the price elasticity of demand when the price of Schmeckt Gut Energy
Bar increases from $1 to $2.
Price Quantity Demanded
1 30
2 20
Initial Price= 1
New price= 2
Initial Quantity demanded = 30
New quantity demanded = 20
Price Elasticity of Demand= % change in quantity demanded/ % change in price
% change in quantity demanded = New quantity – Initial quantity
=20-30
=-10
% change in price= New price- Initial Price
=2-1
=1
The negative sign will be ignored in quantity demanded as there is the inverse relationship due to
which the negative sign occurs.
Price elasticity of demand=10/1
=10
Therefore, the price elasticity is 10.
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B. What is the price elasticity of demand when the price of Schmeckt Gut Energy Bar is $
1.50.
Price Quantity Demanded
1 30
1.50 25
Original Price= 1
New Price= 1.50
Original Quantity= 30
New quantity= 25
% change in quantity=25-30
=-5
% change in price= 1.5-1
=0.5
Price Elasticity= 5/0.5
=10
Hence, the price elasticity of demand at $1.50 is 10.
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3. Calculate cross price elasticity of demand for Fly High’s Energy bars sold with
respect to the price of Schmeckt Gut Energy Bar.
Price Quantity demanded of
Schmeckt Gut Energy Bar
Quantity demanded of Fly
High’s Energy bars
$3 10 11
$2 20 9
Percentage change in the price of Schmeckt Gut Energy Bar= -33%
Percentage change in demand of Fly High’s Energy bars= -18%
Cross price elasticity of demand=% change in quantity demanded of Fly High’s Energy
bars / % change in price of Schmeckt Gut Energy Bar
=-18%/133%
=0.54
Here, the price elasticity is positive so it can be said that the goods are the substitute goods.
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4. Investigate whether the Schmeckt Gut Energy Bar and Fly High’s Energy bars are
complementary goods, substitute goods or there is no relation between the two.
It can be said that the Schmeckt Gut Energy Bar and the Fly High’s Energy bars are the
substitute goods as the price elasticity of both the goods is positive (Tutor2U economics, 2018).
The substitute goods mean that the demand for one good is increased if the price of another good
is also maximized. So, if the price of Schmeckt Gut Energy Bar will increase the demand for the
Fly High’s Energy bars will also increase (Tutor2U economics, 2018).
Image: Elasticities of Substitute Goods
Source: Tutor2U Economics, 2018
It can be predicted from the picture that the Elasticities depends upon the nature whether the
good is close substitute or the weak substitute (Tutor2U economics, 2018). The pricing of the
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substitute is that if the competitor will cut the price of product the firm can easily predict the
demand and the total revenue of the another product. For example in the above case the price of
the Schmeckt Gut Energy Bar decreased from $3 to $2 by which the demand for the substitute
goods has been increased by increasing the demand of particular product (Tutor2U economics,
2018). Therefore, both the products are the close substitute of each other so it can be said that the
small rise in the price of Schmeckt Gut Energy Bar will lead to the greater increase the demand
of Fly High’s Energy bars for the same product (Tutor2U economics, 2018).
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Problem C
1. Provide suggestions to ensure the smooth introduction of the Schmeckt Besser
energy Bar related to the different market structures and identify the market
structure for energy bars.
There are various markets that can be looked upon for the smooth launch of the product. The
markets can be the perfect market, monopoly market, monopolistic and the oligopoly market
(Triple Learning, 2018).
Perfect Competition:
The perfect competition is the market where there are large number of the buyers and sellers and
the producer is the price taker not the price maker. In the perfect market the homogeneous
product is sold with no control over the supply and price of market. With this the main
characteristic of this market is that the buyer and the sellers both have the perfect knowledge
about the product (Triple Learning, 2018). To maximize the profits of the organization will set
the marginal revenue equals to the marginal cost of the product. For all the firms the AR and MR
will be same (Triple Learning, 2018).
Image: Cost and Revenue relation
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Source: Triple Learning, 2018
Monopoly Market:
The monopoly market shows that there is one single seller and the large number of buyers. In
this market the unique product is sold in the market with the restriction of the entry of the new
firm in the market (Bennett, et. al., 2012). There in monopoly there is lack of competition within
the market for producing the goods and services. Here the seller is price maker as the price and
the quantity is decided by the seller so that to maximize the revenue (Bennett, et. al., 2012).
Image: price determination under the monopoly
Source: Agarwal, 2017
The monopoly market the profit is maximized with the rule of MC=MR (Bass, 2018). If the
higher price will be charged the less of the quantity will be demanded and which in turn will not
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maximize the profits. So, to sustain in the market the seller keeps the price lower than the
competitor’s price so that the profits and the revenues can be increased.
The Schmeckt Besser energy Bar will be sold in this market as this will maximize the profits if
the seller by keeping the lower price with that of the competitor and the seller can determine its
own price as it’s the price maker not the price taker. Whenever the seller needs to increase its
profits it will lower or increase the price according to the price of Fly High’s Energy bars so that
the demand for the goods can be increased and the super normal profits will be earned.
Monopolistic Market:
The monopolistic market is the market where the seller sells the product that is different from
one another (Agarwal, 2017). Therefore these products are not perfect substitutes of each other.
In this market the decision of the one firm in the market is not affected by the decision of other
firm. The market power is low as they all are the price makers and they heavily relay on
advertise of the product. The demand for the product under this market is more elastic as
compared to that of the monopoly market (Agarwal, 2017).
Image: Monopolistic Market
Source: BC Campus, 2018
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The price under the monopolistic competition the profits are determined where the marginal cost
and marginal revenue intersects. It is determined at the equilibrium level (Agarwal, 2017).
Oligopoly Market:
It is the market where there are few sellers who are selling the homogeneous and the
differentiated products in the market. It will reduce the level of competition and lead to the
higher price of the consumers (Agarwal, 2017). It lies between the pure monopoly and
monopolistic competition which have the control over all the other factors. The characteristics of
the market are that the firms have the significant barriers to the entry of the firm (Agarwal,
2017).
Image: Oligopoly Market
Source: Agarwal, 2017
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The prices under this market are not cut by the seller as it leads to the price war between the
sellers for the product. The larger firms in the market cur the prices so that the smaller firms in
the market cannot compete (Agarwal, 2017). The big firms also rise up its price so that the
demand can be increase and the profits of the organization can be maximized.
2. Can you think of the specific task for the Schmeckt Gut Research Department in
reference to a market research analysis.
The market research analysis which is done shows that the new product should be launched in
the monopoly market so that the price of the product can be determined by the individuals itself
according to the other prices in the market. But the Schmeckt Gut Research Department should
do some of the research so that the sale of the products can be increased and which in turn also
increases the revenue of the firm (Triple Learning, 2018). With this the research should also be
done that what all are the characteristics of the monopoly market which in turn will enhance the
analysis of market which is done by the individuals. The supply and the demand should also be
considered so that the equilibrium price of the product can be determined and the decisions
related to the launch of the new product in the market can be determined. The research
department should also look for the areas which will help in increasing the marginal revenues for
the product by decreasing the marginal cost for the particular product so that the overall
efficiency and the effectiveness in the market structures can be maintained (Triple Learning,
2018). So, the researcher should be more focused towards the characteristics of the market before
introducing the new product within the organization (Triple Learning, 2018).
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References
 Dineshbakshi, 2018. Equilibrium. [Online]. Dineshbakshi. Available at:
http://www.dineshbakshi.com/ib-economics/microeconomics/revision-notes/678-market-
equilibrium-price-determination. [Accessed On 19 June 2018]
 Tutor2U economics, 2018. Cross Price Elasticity of Demand. [Online]. Tutor2U
economics. Available at: https://www.tutor2u.net/economics/reference/cross-price-
elasticity-of-demand. [Accessed On 19 June 2018]
 Triple Learning, 2018. Perfect competition. [Online]. Triple Learning. Available at:
http://www.sanandres.esc.edu.ar/secondary/economics%20packs/microeconomics/
page_116.htm. [Accessed On 19 June 2018]
 Agarwal, P., 2017. Characteristics of a Monopoly Market Structure. [Online]. Intelligent
Economist. Available at: https://www.intelligenteconomist.com/monopoly-market-
structure/. [Accessed On 19 June 2018]
 Bennett, J. and La Manna, M., 2012. Mixed oligopoly, public firm behavior, and free
private entry. Economics Letters, 117(3), pp.767-769.
 Suleiman, B., Sakr, S., Jeffery, R. and Liu, A., 2012. On understanding the economics
and elasticity challenges of deploying business applications on public cloud
infrastructure. Journal of Internet Services and Applications, 3(2), pp.173-193.
 Bass, B., 2018. The Elasticity Approach to Balance of Payments. [Online]. Chron.
Available at: http://smallbusiness.chron.com/elasticity-approach-balance-payments-
24975.html. [Accessed On 19 June 2018]
 Meng, Y., Brennan, A., Purshouse, R., Hill-McManus, D., Angus, C., Holmes, J. and
Meier, P.S., 2014. Estimation of own and cross price elasticities of alcohol demand in the
UK—A pseudo-panel approach using the Living Costs and Food Survey 2001–2009.
Journal of health economics, 34, pp.96-103.
 Baumeister, C. and Peersman, G., 2013. The role of time‐varying price elasticities in
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Econometrics, 28(7), pp.1087-1109.
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