ECONOMICS OF MANAGERS Table of Contents Answer to question a).................................................................................................................2 Answer to question b)................................................................................................................7 Answer to question c)...............................................................................................................11 References list:.........................................................................................................................15
ECONOMICS OF MANAGERS Answer to question a) The concept of price elasticity of demand is understood widely and the most common measure of the sensitivity of the consumers to price is known as the price elasticity of demand. Price elasticity measures the proportionatechanges in the demand for any particular product due to change in its price. Classification of elasticity can be done as elastic and inelastic where elastic occurs when the elasticity is more than negative and inelastic when the elasticity is close to zero or smaller. Goods or the products having fewer substitutes and are required for every consumption tends to have lower elasticity compared to the goods that not essential and have wide range of substitutes. Price elasticity of demand can be computed by dividing the percentage change in quantity demanded due to percentage change in price (Gouel & Laborde, 2018). There are five different types of price elasticity that can be represented on the demand curve. Such elasticity comprise perfectly elastic, perfectly in elastic, relatively elastic, relatively inelastic and unitary elastic.
ECONOMICS OF MANAGERS The upper portion of the demand curve represents relatively elastic demand as an increase in price would cause demand to change by larger amount. On other hand, lower portion of demand curve represents relatively inelastic demand as increase in price would not changedemandbysignificantly.Differenttypesofpriceelasticitycanbeexplained individually (Moser 2016). Perfectly elastic demand-Under this, a small change in price would cause an indefinite change in the quantity demand. However, such scenario does not occur in reality. The graph tends to be a line running parallel to quantity axis. Relativelyelasticdemand-Anyproportionatechangeinpricecauses demandstoincreasebylargerpercentagethanincreaseinprice.Thedemandcurve representing the relatively elastic demand is flatter as shown in the diagram below. P Q D Q11Q2Q31 D P1 Po Q1Q2 2
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ECONOMICS OF MANAGERS Unitary elastic-Any percentage change in price would cause the demand of product to change by same proportion.This type of elasticity barely exist in reality. Perfectly inelastic demand-Any change in price would not impact the quantity demanded and irrespective of price level, demand will remain constant. Relatively inelastic demand-Any proportionate change in price would cause the demand to increase by lower percentage that increase in price. It can be represented by the graph below: Q P P P1 Q1Q2 P Q
ECONOMICS OF MANAGERS The pricing decisions of the business and firms is crucially influenced by the concept of elasticity of demand.Elasticity concept is one of the important metrics for the managers determining the product’s price. The objective of marketing manager is to shift the products from being relatively elastic to relatively inelastic. In addition to setting the price of the products by the firms, elasticity also plays an important role in deciding about the price that should be paid to the factor of production (Falkner, 2016). The formulation of policies by the government is also dependent upon the concept of price elasticity of demand. The goods with inelastic demand would have higher amount of tax imposed on it compared to the relatively elastic products. One of the influential role is played by price elasticity of demand in determining the price for monopoly. This is so because monopolist tends to charge higher price for their products as there do not exist competition in the market (Dittrich et al., 2016). It is therefore utmost important for the monopolist to evaluate the elasticity of the products when determining its price. The actual estimates of the elasticity of the demand for products is identified by reviewing some economic journals explaining the concept of elasticity. In one of the articles titled” Long run demand for energy services: Income and price elasticity over hundred Q P P1 D Po Q1Qo
ECONOMICS OF MANAGERS years”, an investigation into the change in the demand for energy services. An evidences on price and income elasticity of change in demand for energy over the last two hundred year has been presented. Priceelasticityof energy servicescan be broken down into the substitution and income effect. The estimated value of price elasticity of demand for the energy services has been assumed to be one. There would be a reduction in the price of energy due to improvement in the energy efficiency by 1% (Fouquet, 2014). The price elasticity of demand for the energy services is zero due to fall in the consumption of energy and decline in the price of energy service. Another journal article Titled” High frequency evidence on the demand for gasoline” studies about the price elasticity of gasoline over the years. The responsivenessof demand of gasoline is critical, to understand for evaluating the policies and determining the tax rates. In this study, a model of frequency of purchase is adopted to help in explicitly explaining the relation between the expenditure and demand for gasoline. It was found that the magnitude of price elasticity of demand for gasoline is larger than the estimates. Using the model, it was found that the estimates of elasticity of gasoline demand has a range from -0.27 to -0.35 (Levin et al., 2017). The demand estimates compared to the recent studies is more elastic in the current paper. It has been found from the analysis that the demand for gasoline might be considerably more responsive to change in price and in recent years, demand for gasoline has become more inelastic. There would be substantially less increase in the gasoline price if the demand were more elastic that what was thought (Basu & Bundick, 2017). For the producers, price elasticity of demand plays an important role in setting the price of their products and determining the optimum level of output. It is required by the firms to have knowledge about whether the demand for their products is relatively elastic or relatively inelastic. Such knowledge is used to the advantage of the firms or producers in setting their price strategy. Furthermore, in event of deciding about the prices incurred for
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ECONOMICS OF MANAGERS acquiring factors of production is also influenced by elasticity of demand. Therefore, when setting the price of products, accounting for the price sensitivity is the important part of strategy. Considering the price sensitivity is particularly important for the producers when they are deciding to change then price or introducing some new products and services in the market. For the products with relatively inelastic demand, producers can maximize their product by charging higher price and they should adjust the price of the products with relatively elastic demand accordingly (Fuentes et al., 2016). Price elasticity is heavily accounted by the monopolist who practices price discrimination. From the discussion, it can be inferred that for the maximization of the profits and thereby revenue generated by the producers is dependent upon the elasticity of demand. Answer to question b) Oligopoly market structure is characterized by the existence of few sellers and large number of consumers selling either differentiated or homogenous products. There can be different types of oligopolists dominating the market such as differentiated, collusive, perfect or pure and non-collusive oligopoly. The characteristics of oligopoly market is discussed in the below mentioned points. Entry or expansion barriers-New firms cannot enter the industry when the existing firms are earning super normal profit in the long run and in the same manner, in the event of firms incurring losses, they cannot exit the industry. The barrier to entry or expansionarecloselyrelated.However,therecanbesomeexceptiontothis characteristics. With the decline in the barriers, incentives of the firms to cheat increases. There is considerable barriers to exit and entry in petroleum industry due to high sunk costs (Toutkoushian & Paulsen, 2016).
ECONOMICS OF MANAGERS Interdependence-Interdependency makes one firm operating in the market being impacted by the action of other firms. The hallmark of the oligopoly market is recognized interdependence and the interdependence results in translating into the supra competitive pricing. The interdependency and interaction between the various firms in the oligopolistic market make it a fascinating market structure (Zheng et al., 2017). Intermediate demand curve-The inclination of the firms toward regularly changing the product and output due to the actions of other firms causes the demand curve to be kinked. This implies that at the price prevailing in the market, oligopolistic faces a kinked demand curve and the firm would be facing two demand curves (Xu et al., 2017). Non price competition-Firms in the oligopoly market compete with each other by increasing the volume of the products and they do not compete on price wars. The non-price competition takes the form of advertising and variations in terms of service, design, quality and style of the products. Firms intends to maximize their revenue subjected to the constraints of minimum profit. It is argued that sales would be impacted by the measures of adopting non-competition, but the positive impact on profitability is doubtful (McAlister et al., 2016).
ECONOMICS OF MANAGERS Profit is maximized at output level OQ1and the firm would attain equilibrium at Q3 level of output, if it intends to maximize profits. The car manufacturing industry is dominated by few large firms that differentiates theirproductsusingadvertisingwhointeractfrequentlywiththemutualindependent behavior.The oligopoly in the car manufacturing market is evident as the market is dominated by some of the few players such as Toyota, Holden, Mazda, Hyundai, Ford, Mitsubishi, Volkswagen, Ford, Honda, Subara and Nissan. The extremely competitive structure of the firms in the oligopoly market makes it distinctive. Small players in the car market is extraordinarily influenced by some the small number of big companies.The production in the global car market is dominated by ten leading firms from few countries such as Italy, Japan, China, Germany and USA. Firm’s concentration the car manufacturing industry is measured by the indexes and concentration ratios and that helps in gauging the competitive environment in the industry (Pearson 2016). Car market is characterized by the global integration of greater degree due to the leveraging designs efforts by the global firms across the products that are sold in the multiple
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ECONOMICS OF MANAGERS markets. Moreover, car industry has multiple production regions due to the buyer supplier relationship and design activities along with manufacturing of vehicles in the multiple regions and tailoring to the local markets (Head & Spencer, 2017). Players in the car market are continuously changing their business model with the objective of competing with other players in the market. The domestic players in the car market are required to compete with the foreign competitors with increase in globalization. It has been found by the domestic competitors of the car manufacturer hard to compete due to gaining accessibility of the various foreign competitors into the home market and this make them obtain lower production cost and raw material. If the home manufactures play on the existing business model, they would incur higher costs and run behind their competitors. In addition to this, it is also a known fact that the oligopolies compete on other facts rather than price. Therefore, to compete with the competitors, car manufacturers have to keep on introducing new models.Change in the business models helps the manufacturers in adding variations to their products introduced by the efficiency in the manufacturing process by way of reducing cost and promoting the products (Hansen & Hoenen, 2016). Furthermore,theadoptionofnon-pricecompetitionmeasuressuchasbrand differentiation and advertising impacts the manufacturer of cars. Some manufacturers of cars might differentiate the products such as line of its car manufactured using differentiation strategy that assist in pointing out significant differences between the products of one firm and its competitors. The uniqueness offered by the differentiation strategy helps in building the customer loyalty. One of the most popular players in the auto market is BMW that compete with its competitors using the differentiation strategy and manufacturing detailed and innovative products. Auto products creation that is emotionally relatable to the emotions of customers is one of the strategy used by BMW for differentiation (Aghion et al., 2016).
ECONOMICS OF MANAGERS Such differentiation focusing on the value highlights the durability and cost savings of the products. The power of advertising has been leveraged by the automakers since the early 1990s with the objective of generating business and thereafter leading the revolution in advertising. The focus of automakers from the perspective of advertising is to capture the attention of customers and drive the brand awareness. For the automotive companies, advertising is considered as the key and when it comes to advertising, car manufacturers are regarded as the biggest spenders. The opinion of the consumer towards different types of car is impacted by advertising and an enormous amount on advertising.Innovation has taken a center place in the automotive industry because of consistent challenges being faced by the automakers to manufacture efficient, smarter and faster cars. It is important for consumers to make them aware of such features which is mostly done by way of advertising and indirectly increasing their sales (Bauner et al., 2016). During the first half of 2014, an amount of $ 928 million was paid out by general motors with their global advertising expender recorded at $ 5.5 million. In United States, Toyota is marked as one of the top ten spenders when it comes to advertising. The advertising strategyusedbyToyotaissponsoringeventsandmadeuseofmediasuchasTV commercials, newspaper ads, internet, large ad billboards and posters. Nissan on other hand emphasize on the comparative advertising and their commercials are mostly aimed at making the products stand out from their competitors’ products (Malik et al., 2018). Answer to question c) The change in the climatic condition is impacted by steadily rising of the average temperature since 1960s. This rise in temperature is incorporated in the greenhouse effect that cause the temperature of the surface of earth to rise. Greenhouse concentration has been
ECONOMICS OF MANAGERS dramatically increased due to various human activities such as burning of oil and coals. Most of the basic pattern of weather is expected tochange due to enhanced greenhouse effect. The carbon cycle and the atmospheric carbon dioxide is reduced by the formation of fossil fuels and limestone and chemical weathering. Addition of carbon dioxide is being done at faster front as against its removal from other part of the carbon cycle. The uptake and rise of carbon dioxide in the atmosphere is affected by rising human activities such as land clearing, burning of fossil fuels and agriculture (Science.org.au, 2020). Therefore, the change in the climate of Australia is impacted by rise in temperature brought by the production of greenhouse gases. The vulnerability of the society, economy and environment as a whole is significantly impacted by thechange in climactic conditions and extreme weather. The extreme events has been observed with some changes such as record breaking temperature, increase in fire weather and heat waves. As acknowledged by the financial regulators of Australia, one of the central concern facing the financial and economic stability is climatic change. Australian economy is impacted by few forces of the climate change that has resulted into the systemic and persistence risk. Climatic change has directly impacted the macroeconomic scenario in the form of damaging infrastructure and property, lowering agricultural yields and hiking the commodity price. The extreme weather is expected to bring a downfall in the property value to $ 571 billion and if the emission continues to be higher, then the value would be further lost in the coming decades (Sirami et al., 2017). The major threat around 2050 is the progressive increase in the coastal inundation and flood risk to the low lying properties near rivers and coastlines. In addition to this, food production and agriculture is already impacted by the extreme events such as heat waves, drought, cyclone and floods. In terms of human health, the highest impact created by the climatic events is heat waves and creating impact on mortality (aph.gov.au, 2020). Moreover, it is perceived that depending on the lifestyle and socio economic factors, there might be expansion of vector borne disease.
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ECONOMICS OF MANAGERS The government of Australia is committed to propose actions and measures to address thechanging climatic conditions with the objective of lowering down the energy prices and contributing to economic growth.A climate solutions package has been announced by the government of Australia with the efforts to reduce the emission of greenhouse gases across the country. In addition to this, continuous investment is being made in the expansion scheme of Snowy Mountain. Households and business are assisted in lowering their energy bills and improving the efficiency of energy (Kononenko & Kugai, 2019). The first target of reducing greenhouse gas was beaten by the country by 128 million tonesunder theKyoto Protocol(2008-2012). In additionto this, theyareall setto overachieve their target by 240 million tones under second Kyoto Protocol (2013-2020). The reduction of green souse gas target by 26 to 28% in 2030, which is below the level in 2003 is achievable and responsible. Such efforts would lower the emission per person by 2030 along with a reduction in the intensity of emission.Direct action policies are designed to meet the target of climaticchange with such policies being highly and polarized political issue in Australia (Nocke & Schutz, 2018).
ECONOMICS OF MANAGERS Anothervoluntaryschemeistheemissionreductionfundthatoffersfinancial incentives to landholders, business and other communities to reduce emission of carbon. Under this scheme, greenhouse gas abatement is purchased by the government through a process of auction. Government has purchased a total of 143 million tons of carbon emission under the three auctions held. Another plan on which the government is relying is plan of national energy productivity so as to meet the emission reduction target of 2030. This plan has the objective of promoting the more productive of energy services and encouraging the consumer choices. Furthermore, measures are announced to reduce the hydro fluorocarbons emission and it involves banning of the maintenance and installation of equipment containing hydro fluorocarbons and also banning the import of such equipment. Other options to improve the efficiency of fuel has also been undertaken by the government (Fang et al., 2019). Therefore, from the analysis of the measures and efforts being taken to address the changein the climactic conditions, it has been found there is a continuous efforts manage the change throughmitigation and adaption.
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