Economic Principles & Decision Making for Schmeckt Besser Energy Bar Launch

Economic Principles & Decision Making
ECON6000
STUDENT ID:
[Pick the date]

Problem A:
1) The information provided indicates that Schmeckt Gut has plans to introduce Schmeckt
Besser energy bar in the market. In order to ensure a successful launch of the product, the
elasticity concept is quite vital. Elasticity essentially highlights the demand change in the
underlying product or service when a unit change tends to occur in the underlying factor.
There are a host of factors ranging from consumer income, product price or pricing of
other goods that can impact the underlying product demand and hence need to be
considered (Mankiw, 2014). One of the most common elasticities is the price elasticity
which highlights the impact of price change on demand. Typically for normal goods price
and demand are inversely related. However, the magnitude of price elasticity determines
whether the demand is elastic or inelastic which plays a pivotal role in product pricing.
Besides, the income elasticity highlights the impact of changing consumer income level on
product demand. This would enable the company to identify the key target segment from
income perspective. Thus, elasticity is quite pivotal for taking key economic decisions
related to the new product launch (Mankiw, Mankiw & Taylor, 2015).
2) The research department should compute the price elasticity of demand which will help
understand if the demand is elastic and inelastic. The pricing decision for the product
launch would be dependent on the same and for elastic demand, lower pricing can be quite
effective. However, in case of demand being inelastic, the focus would be on product and
brand based differentiation as lower price point would not help. The expected cross
elasticity of the new product with regards to the established competitors also needs to be
outlined since it would enable the company to predict the likely response from the
established players and the impact on sales. Also, income elasticity also ought to be
considered as it would help in determining the target customers (Krugman & Wells, 2014).
Problem B:
1) The price which would maximise the revenue can be found by using the given data of
price and quantity demanded and estimating the revenue for each price. This is carried out
and summarised below.

The maximum revenue of $ 40,000 is obtained when the price of the energy bar is $ 2 per
unit. The price elasticity needs to be estimated for this price which is computed as follows
(Nicholson & Snyder, 2015).
.
Thus, at the revenue maximising price, the product has unit elasticity.
2) The relevant price elasticity computation is illustrated as follows.