Economic Principles and Decision Making

This document discusses the importance of elasticity in economic decision making, specifically price elasticity of demand, income elasticity of demand, and cross price elasticity of demand. It also explores the market structure of Besser energy bar and provides suggestions for analyzing and understanding the market structure.

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
1.Importance of elasticity............................................................................................................2
2. Suggestion to the Research Department..................................................................................3
Problem B........................................................................................................................................3
1.Maximum revenue and price elasticity.....................................................................................3
2. Price elasticity in different scenarios.......................................................................................4
3. Cross price elasticity of demand..............................................................................................6
4. Relation between Schmeckt Gut Energy Bars and the Fly High Energy Bars........................6
Problem C........................................................................................................................................7
1.Martket structure of Besser energy bar.....................................................................................7
2. Suggestion related to the analysis of market structure............................................................7
References........................................................................................................................................9

2ECONOMIC PRINCIPLES AND DECISION MAKING
Problem A
1.Importance of elasticity
Different economic concepts play an important role in taking correct business decision.
One such vital topic influencing demand, supply and pricing decision of business is elasticity of
demand. Given the scenario that Schmeckt Gut has planned to introduce Schmeckt Besser energy
bar, it should consider the three important types of demand elasticity – price elasticity of
demand, income elasticity of demand and cross price elasticity of demand.
Price elasticity of demand is a measure of responsiveness of demand for a given change
in price. Demand is considered to be relatively elastic if proportion of change in demand is larger
than proportion of change in price (Foxall, 2013). Demand is inelastic if demand responds less
than price. The concept of own price elasticity matters for the business because of its implication
on revenue. If the company observes demand of energy bar is relatively inelastic then it should
charge a high price. In contrast, if it is found that demand is relatively elastic then it should
charge a lower price to gain more revenue.
Income elasticity shows responsiveness of demand for a change in income. If income
elasticity is positive and greater than 1, then this implies increase in income has a positive effect
on demand for energy bar. In this situation, an increasing trend in income thus has a positive
influence on sales volume of the company. Finally, the company should consider the change in
demand if energy bar following a change in price by its competitors. This is measured by cross
price elasticity of demand (DeCicca & Kenkel, 2015). If there are many substitute products
available in the market, then introduction if Besser energy bar will increase demand of Schmeckt
Gut’s energy bar while lowering the demand of rivals’ product.

3ECONOMIC PRINCIPLES AND DECISION MAKING
2. Suggestion to the Research Department
As suggested from previous discussion, the concept of elasticity plays a vital role in
marketing decision especially those related to price determination. It is therefore responsibility of
the research department to collect information on price, income and price of rivals’ product and
examines its association with demand. Based on this information the research department can
estimate elasticity of demand which is crucial to the company (Oliveira-Castro & Foxall, 2016).
In order to make a smooth introduction of its energy bar the company should encourage the
research department to correctly estimate different elasticity measures. The estimated elasticity
further needs to be evaluated before launching Besser energy bar in the market.
Problem B
1.Maximum revenue and price elasticity
The computed values of revenue at different prices show that Schmeckt Gut will earn a
maximum revenue at price equals $2.00. At this price the company earned maximum revenue of
$40.
The estimated demand elasticity at this price using point price elasticity of demand is

4ECONOMIC PRINCIPLES AND DECISION MAKING
2. Price elasticity in different scenarios
a. Price increases from $1.00 to $2.00
The price elasticity of demand in this price range is computed using the method of mid-
point elasticity.

5ECONOMIC PRINCIPLES AND DECISION MAKING
b. Price elasticity of demand when price is $1.50

6ECONOMIC PRINCIPLES AND DECISION MAKING
3. Cross price elasticity of demand
4. Relation between Schmeckt Gut Energy Bars and the Fly High Energy Bars
The relation between two goods can be understood from the sign of cross price elasticity.
A positive value of cross price elasticity implies as price on one good increased, it increases
demand of the related good. If measured cross price elasticity is negative then this implies that as
price of one good increases, it reduces demand for the related good (Imbs & Mejean, 2015). The
obtained cross price elasticity between Fly High Energy Bars and that of Schmeckt Gut’s Energy

7ECONOMIC PRINCIPLES AND DECISION MAKING
Bar is positive meaning the two goods are substitute. That is a reduction in price by Schmeckt
Gut reduces the energy bar demand of Fly High.
Problem C
1.Martket structure of Besser energy bar
Another important area of economics having implications for business is the form of
market structure and associated features. Price and output decision in a market depend on
specific type of market in which the firm operates (Baldwin & Scott, 2013). The attempt of
Schmeckt Gut to introduce Besser energy bar in the market requires the company to understand
the market structure of energy bar. It is very unlikely that the company will face perfectly
competitive market structure. Rather it will face imperfect competition specifically like
monopolistic competition or oligopoly. A market structure is considered as monopolistically
competitive if a considerably large number of sellers in the market sells a differentiated product.
Market structure is oligopolistic in nature if the specific market is highly concentrated among
small number of large firms (Cowell, 2018). In both the market firms attempts to sell a highly
differentiated product to increase their customer base. Firms especially in the monopolistically
competitive market incur a huge expenditure on advertising. In order to launch Besser energy bar
in the market, the company should differentiate the energy bar from that of its competitors.
Production differentiation is not the only way to successfully introduce the energy bar. An
important part of the marketing strategy should be promotion of product and spending on
advertising to inform people about the special features of the product (Whitehead, 2014).
Understanding market structure and designing suitable marketing strategy before entering the
market will ensure a smooth introduction of energy bar.

8ECONOMIC PRINCIPLES AND DECISION MAKING
2. Suggestion related to the analysis of market structure
Above discussion suggests that market structure plays an important role in designing
marketing strategy. The research department should conduct research on identifying market
structure of energy bar. One important attribute of market structure is number of buyers and
number of sellers in the market. The research department should evaluate degree of competition
among existing sellers in the market. Another important thing that the company should examine
the number of buyers in the market (Waldman & Jensen, 2016). The nature of product is another
important aspect that should be evaluated to confirm the market structure. Identification of
degree of competition and nature of the product will provide useful insights about market
structure of energy bar.

9ECONOMIC PRINCIPLES AND DECISION MAKING
References
Baldwin, W., & Scott, J. (2013). Market structure and technological change. Taylor & Francis.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
DeCicca, P., & Kenkel, D. (2015). Synthesizing econometric evidence: The case of demand
elasticity estimates. Risk Analysis, 35(6), 1073-1085.
Foxall, G. R., Yan, J., Oliveira-Castro, J. M., & Wells, V. K. (2013). Brand-related and
situational influences on demand elasticity. Journal of Business Research, 66(1), 73-81.
Imbs, J., & Mejean, I. (2015). Elasticity optimism. American Economic Journal:
Macroeconomics, 7(3), 43-83.
Oliveira-Castro, J. M., & Foxall, G. R. (2016). Dimensions of demand elasticity. The Routledge
companion to consumer behavior analysis, 121-137.
Waldman, D., & Jensen, E. (2016). Industrial organization: theory and practice. Routledge.
Whitehead, J. (2014). Microeconomics: a global text. Routledge.