Elasticity of Sales, Price Elasticity of Demand, Income Elasticity, Revenue and Cost, Profit maximisation and Cost minimisation

STUDENTNAME: LABLU HUSSAIN
STUDENT ID: 1303804
MODULE TITLE: MANAGEMENT ECONOMICS
Module Lecturer’s Name; Ravshonbek Otojanov
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Table of Contents
Part A.........................................................................................................................................3
(a) Elasticity of Sales.................................................................................................................3
(b) Price elasticity of demand..................................................................................................4
(c) Income Elasticity..................................................................................................................5
(d) Revenue and Cost.................................................................................................................6
(e) Profit maximisation and Cost minimisation.........................................................................8
(F) Intuitive Analysis...............................................................................................................10
Part B........................................................................................................................................11
a. Brief history of the international company Microsoft..........................................................11
b. Discussion of the nature of the market structure of Microsoft.............................................12
c. Nature of the market to which Microsoft belongs in the history..........................................14
d. Discussion about the characteristic of the past market structure of Microsoft....................15
e. Degree of government intervention needed in present form of market of Microsoft..........17
Reference List..........................................................................................................................18
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Part A
(a) Elasticity of Sales
Population Elasticity of sales can be defined as the responsiveness to sales due to change in
population. In other words it means that due to increase or decrease in population to what
extent and how sales is affected (Love,2013, p.125).
Here
ἐs= Elasticity of sales
S= Sales
P= Population
dS= change in sales
dP= change in population
ἐ s=dS /dP× P/S
As given:
ἐs= 0.8
Therefore
0.8= (dS/ (140000-130000))×(130000/S)
0.8= (dS/10000)×(130000/S)
0.8= (dS / 1) × (13/S)
0.8/13= (dS/S)
dS/S= 0.0615
Therefore estimated percentage change in sales would be,
⇒0.615×100=6.1538%.
Now if the population increases by 10000,
The sale is expected to rise by:
⇒(6.1538/100)10000
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⇒ 615.384 units.
(b) Price elasticity of demand
Price elasticity of demand is the responsiveness of price change on quantity or it can be
written as change in quantity demanded due to 1 unit change in price.
Here in this case
P0– Initial Price
Pf– Final Price
P0=7.50
Pf = 8.50
ἐp=0.85
ἐp = (dq/q)/(dp/p)
ἐp = dq/dp×p/q
⇒ ἐp = dq/(Pf –P0)×(7.50/q)
⇒ἐp = dq/(8.50 –7.50)×(7.50/q)
⇒ -0.85= dq/q×7.50
⇒ dq/q=-(0.85/7.50)
⇒ dq/q= -0.113
According to the problem it seems that with one unit increase in price the demand is expected
to fall by 0.113 units.
In terms of percentage, with a percentage change in price,
The demand is expected to fall by 0.113×100 = 11.3% of the initial demand
The rise or fall in revenue is dependent on the nature of the elasticity curve; if the curve is
elastic the revenue is expected to fall with an increase in price, and if the demand curve is in
elastic the total revenue is expected to increase with increase in price, because people have
little choice then to move over to other goods.
Here,
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TR= Total Revenue
dTR= Change in Total revenue
The conditions are if ἐp>1,then dTR<0,which means with an increase in price total revenue
decreases.
ἐp=1then the demand is unit elastic, in this case dTR=0, that is no change in the revenue level
with change in price.
ἐp<1 Total revenue rises dTR>0 with an increase in price.
In the given problem the elasticity is less than 1, which means the demand for the product is
inelastic and the people have little scope to move over for other products and hence the
consumers will have to accept the price and this will result in additional revenue.
If the ἐp =1.1,
Then in this case the price elasticity of demand is more elastic than before hence any kind of
increase in price will lead to a greater fall in demandin comparison to the previous case
⇒ dq/q=-(1.1/7.50)
=-0.1467
Therefore an increase in price while the price elasticity ofdemand is -1.1 will lead to a fall in
demand of the commodity by 0.1467 units which is greater than 0.113 units as calculated
earlier. As the elasticity -1.1 is close to being unit elastic dTR will be close to zero which
means that any increase or decrease in price will not affect the total revenue of the firm in a
massive way.
(c) Income Elasticity
Income elasticity is the responsiveness in quantity demanded due to change in income. If
income elasticity of a good is estimated to be 0.75 which means 1 unit increase in will
increase the demand of the good by 0.75 units (Saada,2013, p.115).
The conditions for income elasticity are:
Where
ἐy- Elasticity of income
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If ἐy>0, the good is normal good
If ἐylies between 0 and 1 i.e. (0≤ἐy≤1) then the good is considered as a necessary good.
Ifἐy >1then the good is considered to be luxury good
Ifἐy<0 the good is considered to be a inferior good.
From the above conditions it can be stated that the income elasticity of 0.75 means that the
good is a normal and necessary good, any kind of increase in price will lead to decrease in
demand and any income rise will lead to increase in demand for product either in absolute or
relative terms. As per the question the said firm depending on the income elasticity’s can
makes its pricing decision and classification of products on whether the good is a normal,
inferior, necessary or luxury good and take measures accordingly.
(d)Revenue and Cost
As per the given case scenario the following table consisting of Total Revenue, Marginal
Revenue, Total Cost, Marginal Cost, Average Cost, Total Profit, and Marginal profit has been
prepared.
Total Revenue: Total revenue in economics refers to the total sales of a firm based on a
given quantity of goods. It is the total income of a company (Shepherd, 2015, p.109). It is
derived by multiplying the price of the good and the quantity of goods sold. In this case the
given total revenue equation is
TR=$800Q - $0.2Q2
Basing on this equation and assuming quantities at an interval of 100 units the Total Revenue
column has been constructed.
Marginal Revenue:Marginal Revenue is the additional revenue that will be generated by
increasing product sales by one unit.
The Marginal Revenue equation for this firm stands to
MR=dTR/dQ =$800- 2(0.2) Q (2-1)
MR=$800-0.4Q
(In order to derive the marginal revenue functiona first order differentiation of the Total
Revenue function of the firm has been performed)
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