Managerial Economics

This document discusses topics in Managerial Economics including elastic and inelastic demand curves, price discrimination, and investment recommendations based on GDP, unemployment, and inflation rates.

Running Head: Managerial Economics
MANAGERIAL ECONOMICS
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Managerial Economics 2
March
Elastic demand is a situation whereby the prices or other given factors possess a huge
impact on the amount of goods or services that the consumers want to buy. It is evident when the
consumers respond to the changes in the prices. In a situation whereby the prices go down, they
will buy more but when the prices rise by a little bit, they will stop buying as much and wait till
the prices return to normal (Sun & Szeto, 2016). The formula for elastic demand is the
proportionate change in the amount demanded divided by the proportionate change in prices. The
graph shown below is used to show elastic demand curve.
(Sun &
Szeto, 2016).

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Inelastic Demand Curve
This is whereby people purchase the same amount of goods and services despite the
change in the prices of the goods or services. The latter occurs only for those things that people
necessitate. Inelastic demand shows how much people’s demand changes in a case where there is
a change in prices.it is calculated by diving the proportionate change in the quantity demanded
by the proportionate change in price (Simpson & Mahin, 2017). The graph below shows the
inelastic demand curve.
(Simpson & Mahin, 2017).
The more inelastic the demand for a commodity, the steeper the curve appears. In a case whereby
there is perfect inelasticity, the curve will turn to be a vertical line.
Since the primary goods for the company are facing elastic demand curve and it is
presumed that the elasticity will go on for several months, it is important for the firm to lower the
prices by a very minute bit so that the y increase their sales and increase their profits (Simpson &
Mahin, 2017). Decreasing the sales will mean that the consumers will highly respond by

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demanding more goods since in elastic demand, any small alteration in price leads to high
increase in demand for the goods or decrease in case of price increase.
If the CEO ignores my advice and increases the price, the consumers will also be highly
responsive to the increase in price and they will stop buying the commodity for some time until
the prices go back to normal (Simpson & Mahin, 2017). It is during this time that the company
will experience reduced sales.
References
Simpson , B. G., & Mahin, S. A. (2017). REDUCING CONCENTRATIONS OF INELASTIC
DEMAND WITH A STRONGBACK. (Vol. 1). Routledge: CRS Press.
Sun, S., & Szeto, W. Y. (2016). Optimal frequency, route and fare structure for transit networks
with elastic demand. In Triennial Symposium on Transportation Analysis, TRISTAN IX
(Vol. 2). Hrvard: Harvard Printing Press.
June
First degree price discrimination also referred to as perfect price discrimination happens
in a case where a firm charges diverse prices for each unit that is consumed. Here, the company
is able to charge the maximum possible prices for every unit that is consumed it is able to capture
the highest possible and available consumer surplus for itself (Bergemann , Brooks , & Morris,
2015). The first degree price discrimination is not affordable in real life situation. The graph
below shows the first degree price discrimination.

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(Bergemann ,
Brooks , & Morris, 2015).
Second degree price discrimination refers to a situation whereby firm charges different
prices for the different quantities consumed and such includes quantity discounts incase whereby
the consumer purchases goods in bulk.
Third degree price discrimination refers to a situation whereby a firm charges different
prices to various consumer groups. For instance, the eye tech firm can charge different price for
the same product to Ophthalmologists, Optometrists, clinics, and hospitals (Tushar , Yuen , &
Smith, 2016).
The EyeTech Company in this case can apply the third degree price discrimination if they
want to increase their sales. This is because; application of the third degree will mean that the
firm is selling its products to different groups at different prices. This will give an opportunity to
the firm to gunner the highest possible profits (Tushar , Yuen , & Smith, 2016).

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References
Bergemann , D., Brooks , B., & Morris, S. (2015). The limits of price discrimination. American
Economic Review, 105(3), 117-134.
Tushar , W., Yuen , C., & Smith, D. B. (2016). Price discrimination for energy trading in smart
grid: A game theoretic approach. IEEE Transactions on Smart Grid, 8(3), 134-156.
September
Based on the GDP of the three countries, I would recommend that the firm invest its
products in Verpaly. This is because amongst the three countries, growth in GDP is highest in
Verpaly. Increased GDP means that the purchasing power of people is high and hence the firm
will make huge sales (Assa, 2017).
Based on the level of unemployment, I would recommend that the firm invest in New
Bazoga. This is because the country has the lowest rate of unemployment and this means that
many people are employed (Assa, 2017). When most people in an economy are employed, it
means that they have an income and therefore the purchasing power is high and hence the firm
will make high sales as compared to a situation whereby it invests in a country that has a high
level of unemployment.
Basing my recommendation on the rate of inflation, it is evident that increased inflation
reduces the purchasing power of a given currency and hence the increased costs. I will therefore
recommend that EyeTech Company expand its operations to Verpaly since the country has
maintained its inflation rate very low (Friedberg, 2018). This will make the company sell large
volume of products since the citizens of Verpaly are experiencing low costs of living.

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Generally, I would therefore recommend that the firm expands its operations to Verpally
since its economy seems to be more stable with fastest growing GDP and inflation rate is low
(Friedberg, 2018). The level of unemployment will be assumed to be high due to other factors
like large population size and will be overlooked.
References
Assa, J. (2017). The Financialization of GDP and its Implications for Macroeconomic Debates
(Vol. 1). Melbourne: CRS Press.
Friedberg, D. (2018). The Role of Income Inequality as a Predictor of Per Capita Gross
Domestic Product (Vol. 1). Sydney: Routledge.
December
Due to increased competition, the EyeTech Company can lower prices. However,
lowering the prices will come with several effects.
Demerits
Lowering prices can damage the brand for EyeTech Company and create customer
relations problems. It will also anger customers who bought the product at a higher price (Comin
, Lashkari , & Mestieri, 2015). This will make the customers to easily shift to alternative goods.
Merits
It will lead to increased purchases; this will happens in a case whereby the firm is
targeting a market for whom market is the primary concern. Reducing the price will also result in
launching new products and entering the market (Comin , Lashkari , & Mestieri, 2015).

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Pros of Maintaining Prices
Maintaining the prices will increase the customer loyalty and also lure customers from
the competitive products that have relatively high prices. This is be because pricing strategy is a
determining factor on the ease of movement of a good.
Cons of maintaining prices
Maintaining prices may make the transactionary operations costly since the production
cost might be expensive and hence the firm might easily exit the market. This is because the cost
of inputs change with time and hence it would not be advisable to make the charges static.
In order to maintain customer loyalty for customers who are considering to buy products
elsewhere, it is good to have a strategy so as to maintain their loyalty.th latter can be achieved
through rewarding the customers once they purchase a product from EyeTech Company, sending
thank you notes after they have made a purchase and returning phone calls promptly after the
customers have placed an order and doing what you promise to do to the customers (Datta ,
Foubert , & Van Heerde, 2017).
Option A is the best option. investing in and offering the same quality equipment so that
the EyeTech Company enjoys the competitive environment will be cheaper. This will be a good
move because EyeTech Company will continue realizing profits even if it will not come up with
a new product for at least four years (Datta , Foubert , & Van Heerde, 2017). The firm will be
sure that it will not exit the market but coming up with an advanced product may make the firm
operate at a risk since it will not operate at a profit for years. If the firm applies option B, it will
run for several years without making profit and this will automatically lead to its exit.

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References
Comin , D. A., Lashkari , D., & Mestieri, M. (2015). Structural change with long-run income and
price effects. National Bureau of Economic Research, 10(3), 134-156.
Datta , H., Foubert , B., & Van Heerde, H. J. (2017). The challenge of retaining customers
acquired with