Economic Principles and Decision Making

Running head: ECONOMIC PRINCIPLES AND DECISION MAKING
Economic Principles and Decision Making
Name of the Student
Name of the University
Student ID

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.