Managerial Economics: Analysis of Festive Goods Market

This article analyzes the market of festive goods under different market structures using microeconomic principles. It explains the rationale behind retailers offering discounts during festive seasons and how it contradicts standard economic theory. The article also discusses the demand and supply equilibrium, elasticity, and pricing strategies of retailers in the festive goods market. The case of live Christmas trees in Singapore is used as an example to illustrate the concepts. The article concludes by highlighting the differences between competitive and imperfectly competitive markets in the context of festive goods.

Running Head: MANAGERIAL ECONOMICS
Managerial Economics
Name of the Student
Name of the University
Author note

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Table of Contents
Answer 4....................................................................................................................................2
Answer a.................................................................................................................................2
Answer b................................................................................................................................3
Answer c.................................................................................................................................4
Answer d................................................................................................................................5
Answer e.................................................................................................................................6
References..................................................................................................................................8

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Answer 4
Answer a
Figure 1: Market of festive good
(Source: as created by Author)
Figure 1 portraits the market of festive goods. The demand for festive goods is
presented as DD. SS curve represents the supply curve for festive goods. Demand and supply
balances at point E. Price is P0 and quantity is Q0. During festive seasons, people increases
demand for festive goods because of their increasing preferences for these type of goods.
When people’s demand changes for factors other than price then this cause a change in
demand reflected by a shift of the demand curve (Maurice & Thomas, 2015). When demand
increases then demand curve shifts rightward. During a decrease in demand, the demand
curve shifts inward. In the festive season, because of increasing preference the demand curve
shifts rightward. After change in demand, the new demand curve is D1D1. With the new
demand curve and existing supply curve, the usual demand-supply equilibrium is attained at

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E1. Corresponding to E1, price increases to P1 and quantity in the market increases to Q1.
Therefore, under general circumstance the increased demand pushes prices upward. The
decision of retailers to offer discount that is offering the good at a lower price thus contradicts
the usual demand supply norms (Nicholson & Snyder, 2014). This in turn creates a puzzle
between standard economic theory and business strategy of retailers during festive seasons.
Answer b
Figure 2: Market for festive good for perfectly competitive retailers
(Source: as created by Author)
For a perfectly competitive market structure, because of presence of numerous buyers
and sellers no single buyers or sellers can influence the price. Firms in this kind of market
have to supply products at the given price. The fixed price in the market makes the demand
curve perfectly elastic. Therefore, the demand curve faced by the perfectly competitive
retailer is horizontal straight line (Cowen & Tabarrok, 2015). The horizontal demand curve is
a distinct feature of perfectly competitive market. The marginal revenue curve is same as the

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demand curve. The upward rising portion of marginal cost curve represents the supply curve
of the competitive market. Price and quantity in the market is determined from equalization
of demand or marginal revenue and supply or marginal cost curve. D shows the demand
curve of the competitive retailer and S is the supply curve. Initially, E is the point of
equilibrium. The price associated with equilibrium point is P0. In the festive season people
increases demand for festive goods. The competitive retailer now face a higher demand. With
an increase in demand, the demand curve will shift upward to D1. As competitive retailers do
not have control over price, price moves in line with demand (Rader, 2014). With increase in
demand, price in the competitive market increases as well. In the festive season thus when
demand increases, the price should also increases. This shows why increase in demand in
festive season should not lead to discounting.
Answer c
Figure 3: Market of festive goods under imperfect competition
(Source: as created by Author)

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Under imperfect competition, the demand curve is downward sloping and is shown by
the average revenue curve. The initial demand curve is shown as AR1. The marginal revenue
curve is shown as MR1. The imperfectly competitive firm takes equilibrium decision at the
point where marginal cost passes through the marginal revenue curve. E indicates the
equilibrium point. Corresponding price and quantity are P1 and Q1 respectively. Elasticity is a
measure of relative responsiveness of demand. Higher the elasticity greater is the demand
curve (Friedman, 2017). In an imperfectly competitive market, sellers using their market
power decides over price and output. The seller can sell a high output at low price or low
output at a very high price. The increase in elasticity is shown from a relatively flatter AR
curve AR2. Following the relation between marginal revenue, average revenue and elasticity
with the flatter AR curve the MR curve will be flatter as well. The new marginal revenue
curve MR2. With changing demand and marginal revenue a new equilibrium point E1
determining price and quantity in the market. The new equilibrium shows a lower price P2
and higher quantity Q2. This implies as the demand becomes more elastic, retailers take
advantage of higher elasticity and reduces price to increase their sales volume (Bernanke,
Antonovics & Frank, 2015). This explains the rationale of sellers to offer a discounted price
during festive season. With standard demand supply condition and in the competitive market
it is seen that high demand should increase the price. This is only the imperfectly competitive
market that shows how change in demand and elasticity influences retailer to lower price or
giving discount.
Answer d
During festivals, everybody celebrates their festive spirits in a single platform. People
willing to celebrate the festive days happily. For their most awaited festivals, people make
demand for additional goods like decorating materials, sweets and increases demand for their
usual goods. They even ready to spend a greater share of their income to fulfill their demand

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in festive seasons. Due to increase in preferences, demand for these goods increases. As
people demand various goods during this time they look for some offers or discount to save
money (McKenzie & Lee, 2016). If any retailer offers a slightly low price, then many people
switch their demand to that shop. In an imperfectly competitive market, sellers can influence
price. In order to undercut competitors’ share they reduce price of goods offered in their
stores.
In Singapore, the demand for live Christmas tree increases rapidly. People prefer to
use live Christmas tree for decorating houses during Christmas. The specialty of live
Christmas tree is that it has a sweet scent as compared to normal plastic tree. People have a
greater preference for real things than non-real things. This pushes the demand for live
Christmas tree up. The retailer sellers such as JM flower, Prince Landscape, Far East Flora,
IKEA and Fun’s Florist & Nursery all face an increase in demand for their product
(channelnewsasia.com, 2018). Demand gets a pick in early December. After Christmas, the
trees are return to the nursery. IKEA offers a 50 percent discount on prices of trees to
increase sales volume.
Answer e
In competitive market, free entry and exist of the firms erodes any short run profit or
loss such that only normal profit left in the market. In the presence of short run profit, new
firms join the industry causing an increase in supply. As a result, price decreases. Entry
continues until price equals to minimum point of long run average cost. In times of loss, firms
close down operation reducing the supply and hence price increases. Ultimately, price is
settled at the minimum of average cost. At this point, firms can only attain a normal profit
(Fine, 2016). However, the characteristics of imperfect competition is different from that of
competitive market. The market structure of festive goods is assumed imperfectly
competitive. The assumption of normal profit is not hold for imperfect competition. Under

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imperfect competition firm does not utilize their capacity fully. That is in most of times they
do not operate at the minimum of average cost. Monopolistically competitive market is a
possible form of market for seasonal or festive goods. In monopolistically competitive
market, long run equilibrium is determined where demand curve is tangent to long run
average cost curve. In the market for seasonal of festive goods firms try to make as much
profit as profitable (Baumol & Blinder, 2015). They offer price or quantity discount to
increase sales volume. Therefore, the long-term equilibrium analyses of competitive market
is not much relevant for seasonal/festive products.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of microeconomics. McGraw-
Hill Higher Education.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave
Macmillan.
Fine, B. (2016). Microeconomics. University of Chicago Press Economics Books.
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University
Press.
Live Christmas trees gaining popularity in Singapore. (2018). Channel NewsAsia. Retrieved
14 February 2018, from https://www.channelnewsasia.com/news/singapore/live-
christmas-trees-gaining-popularity-in-singapore-8242414
Maurice, S. C., & Thomas, C. (2015). Managerial Economics. McGraw-Hill Higher
Education.
McKenzie, R. B., & Lee, D. R. (2016). Microeconomics for MBAs. Cambridge University
Press.
Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application.
Cengage Learning.
Rader, T. (2014). Theory of microeconomics. Academic Press.