Case Study: Economics of Managerial Decision Making for Ace Body Gym

This project provides a comprehensive economic analysis of Ace Body Gym, covering various aspects of managerial decision-making. The analysis begins with determining the equilibrium price and quantity, followed by an examination of the impacts of price ceilings and reductions on demand and supply. The project explores price elasticity of demand, cross-price elasticity, and different price discrimination strategies. It then delves into economies of scope and scale, calculating marginal cost and revenue. Furthermore, the project addresses investment decisions using payback periods, analyzes the market structure, and discusses barriers to entry and exit. Finally, it utilizes decision trees and game theory to evaluate strategic choices and outcomes, including first-mover advantages. References are provided for all the key concepts and theories used in the analysis.

Economics of Managerial Decision
Making

Question 1.......................................................................................................................... 1
a)..................................................................................................................................... 1
(i). To determine equilibrium quantity and equilibrium price in this market:.................1
(ii). Impact of price ceiling on gym supply.....................................................................2
(iii). Impact of price ceiling on gym supply....................................................................2
b...................................................................................................................................... 2
(i). Impact of price reducing for monthly membership price on equilibrium demand and
supply............................................................................................................................. 2
(ii). If providing 50% off on gym membership in summer.............................................3
(iii). Impact of competitors’ price...................................................................................3
Question 2.......................................................................................................................... 5
a. Determine the Price Elasticity of Demand (PED).......................................................5
b. Cross price electivity..................................................................................................5
c. Three ways of price discriminations...........................................................................5
Question 3.......................................................................................................................... 7
a. Explain how Ace Body gym can benefit from economies of scope............................7
b. Ways to get benefit from technical and financial economies of scale.........................7
c. Calculate marginal cost and marginal revenue for Ace Body Gym............................8
Questions 4........................................................................................................................ 9
1. Payback Period...........................................................................................................9
2. Analyse the extent market in which Ace Body Gym operated..................................10
3. Measurements that government consider to regulate................................................10
Question 5........................................................................................................................ 11
1. Market structure of selected organization.................................................................11
2. Explain the barriers for the entry or exit of selected firm.........................................11
Question 6........................................................................................................................ 12

1. Decision tree as Ace Body is first mover..................................................................12
2. Outcomes of best payoff, if Ace Body is the first mover..........................................12
3. Evaluate how result change if Next Gen is the first mover.......................................12
4. Evaluate that, is first mover or second mover is beneficial.......................................12
5. Usefulness of game theory........................................................................................12
REFERENCES................................................................................................................14

Question 1
a)
(i). To determine equilibrium quantity and equilibrium price in this market:
Solution: Given that –
At Price £0 the demanded quantity is 80, while at £80, demanded quantity is 0. Similarly,
at Price £10 the supplied quantity is 0 and at £100, supplied quantity is 90.
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Therefore, from above analysis, equilibrium price and quantity can be calculated by using given
formula –
Qd = 80 – p
Qs = p – 10
at equilibrium state, Qd = Qs
80 – p = p – 10
2p = 90
or, p = 45
so, equilibrium price = £45
While, equilibrium quantity = 80 – p = 80 – 45 = 35 units.
(ii). Impact of price ceiling on gym supply
If Gym membership price will be set £50 per month by government, which lies above the
equilibrium price, then it will create reduce the demand and create a surplus.
(iii). Impact of price ceiling on gym supply
When government set price ceiling of gym membership price as £40 per month, which lies
below the equilibrium price, therefore, it will increase demand and create shortage in the supply.
b.
(i). Impact of price reducing for monthly membership price on equilibrium demand and supply
As per law of demand and supply, changes in price influence the demanded and supplied
quantity of items as well. But if price will be higher then, it will reduce demand and increase
supply which may create surplus, while decrease in price moves increase demand and reduces
supply that results in shortage of same. Therefore, in present case reducing price will create
shortage of supply of gym membership. But at equilibrium state, equilibrium point of
demanded and supplied quantity will also shift, as shown by below figure
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(ii). If providing 50% off on gym membership in summer
This strategy will aid Ace Body Gym in increasing its sales, by attracting more
new customers. Along with this, reducing price by 50% creates shortage in supplied
quantity as well, which will influence the equilibrium demanded or supplied quantity as
well, by shifting the equilibrium towards right direction.
(iii). Impact of competitors’ price
Decrease in competitors’ price, highly impact on sales of a company. In this sense,
to prevent business from decline of sales, Ace Body Gym also needs to promote more
attract offers to its customers for getting their retention. The impact of Next Gen gym’s
price on equilibrium demand and supply can be analysed by below figure –
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Price Price
Demanded quantity Demanded quantity
fig1: Ace Body Gym fig 2: Next Gen Gym
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Question 2
a. Determine the Price Elasticity of Demand (PED)
Revenue of Ace Body Gym in 2018 = £ 2.1 Million
Given that, it is 35% less than previous year, so
Revenue of 2017 =
65% of x = 2.1 million
x = 2.1 x 100 ≈ £3.2 million
65
now, %change in demanded quantity = 20%
while % change in price = Change in price x 100
Original price
= 2 x 100 = 10%
20
Price elasticity of Demand = % change in quantity demanded / % change in price
= -20/10 = -2%
Therefore, demand is inelastic
b. Cross price electivity
Since, price elasticity of demand of Ace Body Gym is lesser than one, therefore, it
indicates that its demand is inelastic. So, consumers are considered as insensitive to price.
Therefore, with reduction of 70% in price of home gyms, may not highly impact on
demand of Ace Gym, so, cross elasticity will be positive in this case.
c. Three ways of price discriminations
As Price discrimination refers to a strategy for increasing sales by charging different
price for same products or services from customers. Therefore, to attract customers and
generate high revenue, Ace Gym can also adopt different-different price discrimination
strategy. It includes perfect price discrimination, under this strategy, services will be
provided on higher price as much as possible, but with great quality. Another way is to
charge different price of its services to customers, by offering them plans on the basis of
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supplied quantity as monthly, quarterly and yearly. On contrast, by segregating the
consumers on demographic basis and set price accordingly, is also help Ace Gym to
maintain its sales and generate high revenue.
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Question 3
a. Explain how Ace Body gym can benefit from economies of scope
The term economic of scope, refers to way where increase outputs results in decreasing the
unit costs. Therefore, in case of Ace Body Gym as it deals at small level, therefore, to get
benefits by increasing outputs, it needs to lower down the average costs, for customers who buy
services for longer term.
b. Ways to get benefit from technical and financial economies of scale
To get benefits from technical economies of scale, Ace Body Gym needs to make high
capital investment on its equipment as fixed costs. This would help in offering more better or
large variety of services to customers which they mainly seek for, where respective firm can
charge high price for the same as well. Similarly, from financial economies of scale, it can use its
own resources for attracting and retaining customers by diversifying the same, from its
competitors.
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c. Calculate marginal cost and marginal revenue for Ace Body Gym
Given –
Marginal cost = Change in cost / change in quantity
Marginal revenue = Change in total revenue / change in quantity
Output Price received
(£)
Total Costs
(£)
Marginal
Cost (£)
Total
Revenue (£)
Marginal
Revenue (£)
1 35 20 - 35 -
2 33 33 13 66 31
3 24 48 15 72 6
4 20 55 7 80 8
5 17 85 30 85 5
6 15.50 108 23 93 8
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Questions 4
1. Payback Period
Projects A B
Cost -£10000 -£25000
Cash Flow Year 1 £4000 £2000
Cash Flow Year 2 £4000 £8000
Cash Flow Year 3 £4000 £12000
Cash Flow Year 4 £4000 £20000
Cash Flow Year 5 £4000 £26000
Cash Flow Year 6 £4000 £32000
Payback period of project A = Initial investment / Cash inflow
= 10000 / 4000
= 2.5 years.
Year Cash Inflow Cumulative cash flow
1 £ 2000 £ 2000
2 £ 8000 £ 10000
3 £ 12000 £ 22000
4 £ 20000 £ 42000
5 £ 26000 £ 68000
6 £ 32000 £ 100000
Payback period of project B = Year before full recovery + Unrecovered cost / cash flow
= 3 + 3000 / 20000
= 3 + 0.15
= 3.15 years.
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Therefore, considering the above analysis, Ace Body Gym need to make
investment in project A, as this would help in recovering the initial investment in two and
half years only.
2. Analyse the extent market in which Ace Body Gym operated
As Ace Body Gym operates in that market, where consumers have relatively less
knowledge than sellers about services they are going to purchase, therefore, there is a
high extent of occurrence of asymmetric information to be occurred. So, it can easily
influence and gain high customers’ retention by providing them information about its
diversifying gym services.
3. Measurements that government consider to regulate
In order to regulate the gym fitness industry, the government has made it mandatory that
fitness trainers will be regulated i.e. they must certified for the same, from affiliated
institutions. Along with this, gym centres also need to offer dispute-resolution
mechanism, where a forum will be undersigned by both customers and centres for
cancellation of any contract in case of complaints regarding with services.
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Question 5
1. Market structure of selected organization
In gym and fitness industry, there is relatively less barrier for new entrance,
therefore, organisations whether small or large is considered to be operated in perfect
competitive market structure. Because a number of firms are operated in same sector
where homogenous products are offered but on different price, as per quality. Therefore,
Ace Body Gym is also operated in perfect competition market structure, but to get
optimum utility, it is need to move into monopolistic market structure, by diversifying its
product or services from other competitors. This would help in earning control power
over price and increasing its customer base as well.
2. Explain the barriers for the entry or exit of selected firm
As Ace Gym Body is currently operated in perfect competition market structure, so,
relatively there is less barrier for entry or exit from same sector.
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Question 6
1. Decision tree as Ace Body is first mover
(5,0)
Next Gen Gym (3,2)
up
(4,1)
Ace Body Gym
down Next Gen Gym (2,3)
2. Outcomes of best payoff, if Ace Body is the first mover
If Ace Body Gym will be the first mover then in first case if both firms (Ace Body
and Next Gen Gym) will stick with the old equipment, then it will provide better
outcomes to present firm.
3. Evaluate how result change if Next Gen is the first mover
As per above case, if Next Gen. will be stick with old equipment, then it will aid more
benefits to this firm, by attracting customers towards its services.
4. Evaluate that, is first mover or second mover is beneficial
Second mover will get more advantage in this case, because, according to strategy
of first mover, it can develop better strategy to retain existing and attract new customers.
5. Usefulness of game theory
Game theory helps in improving strategic decision making processing, by analysing
key facts about how action of competitors will impact on profitability of one company.
So, concerning on each and every fact, better alignment can be made for maximising the
strategic utility. Therefore, using this theory, Ace Body Gym can make decision whether
to move first or taken advantage by second move.
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REFERENCES
Books & Journals
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Galli, B. J., 2020. Economic-Decision-Making in New Product Development: A Review
of the Relationship. International Journal of Applied Management Sciences and
Engineering (IJAMSE), 7(1), pp.1-27.
Gerlick, J. A. and Liozu, S. M., 2020. Ethical and legal considerations of artificial
intelligence and algorithmic decision-making in personalized pricing. Journal of
Revenue and Pricing Management, pp.1-14.
Birt, J. and et. al., 2020. Accounting: Business reporting for decision making. John Wiley
& Sons.
Gu, J., Zheng, Y., Tian, X. and Xu, Z., 2020. A decision-making framework based on
prospect theory with probabilistic linguistic term sets. Journal of the Operational
Research Society, pp.1-10.
Du, Y. and et. al, 2020. Decision-making method of heavy-duty machine tool
remanufacturing based on AHP-entropy weight and extension theory. Journal of
Cleaner Production. 252. p.119607.
Zarbakhshnia, N., Wu, Y., Govindan, K. and Soleimani, H., 2020. A novel hybrid
multiple attribute decision-making approach for outsourcing sustainable reverse
logistics. Journal of Cleaner Production. 242. p.118461.
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