Economics Principles and Decision Making: ECON6000 Module 3 Assignment

This economics assignment analyzes the introduction of the Schmeckt Besser energy bar, applying economic principles to solve related problems. The assignment explores the concept of elasticity, examining how changes in price affect demand and calculating price elasticity in different scenarios. It investigates market structures, particularly perfect competition, and recommends pricing strategies for the new product. The assignment also delves into cross-elasticity of demand, determining the relationship between Schmeckt Gut and Fly High energy bars. Additionally, it considers marketing strategies, franchising options, and the impact of market competition on pricing and product introduction, offering a comprehensive analysis of market dynamics and decision-making in the context of a new product launch. The assignment incorporates calculations and interpretations to provide a thorough understanding of economic concepts in a practical business context.

Running head: ECONOMICS
Economics
Student’s Name:
Institution Affiliation:

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Problem A
1.
Elasticity measures how sensitive the market demand is for a certain product due to changes in
its variables such as price (Esteves & Reggiani, 2014). A high elasticity means that any changes
in a variable, for example a price, leads to a substantial change in demand of the product. About
pricing, elasticity refers to a change in quantity demanded due to a shift in the pricing of the
product (Pagoulatos & Sorensen, 2017). Usually, an increase in price for a product with a high
level of elasticity leads to a significant drop in the quantity demanded. The reverse with inelastic
goods is true. Increases in price do not have much impact on quantity demanded. Knowledge of
elasticity helps a firm make decisions concerning the price of a product and quantity to produce
to maximise profits. Therefore, knowing about the elasticity of Schmeckt Gut energy bars will
allow the firm to determine the pricing of the product.
Price elasticity also permits the firm to gauge factors affecting price and be in a situation to
account for them when determining the price and quantity to produce to maximise profit
(Pagoulatos & Sorensen, 2017). Knowledge of the elasticity will also allow the company to
tamper with the price after its entry into the market as time goes by to take advantage of industry
opportunities while fending off competition by other products (Gmelin & Seuring, 2014). The
firm by use of price elasticity can determine the type of product they are competing with
regarding the type of goods whether they are complementary or substitute or otherwise. The
information can then be used to measure and determine the correct counter responses to
strategies employed by other competing firms (Esteves & Reggiani, 2014). The firm may also
engineer its market strategies in light of this information.
2.

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As stated earlier, elasticity refers to the percentage change in quantity demanded due to a unit
change in the price of a given product. The research department should set the price above the
marginal cost if it operates in a monopolistic market. Within the monopolistic market,
competition is negligible and thus consumers have little choice to choose from (Buer, 2016). A
product in this market can have its pricing above the MC without facing a drop in its market
demand. However, within a competitive market the research department will have to set the price
of the product within the marginal price to avoid a decrease in the quantity demanded (Rankin &
Mintu, 2017).
Problem B:
1.
P = Price Q = Quantity
Maximizing price = $2.00.
Total revenue at given P = P * Q = 2 * 20 = $40 (thousands per day)
Elasticity = % change in quantity/ % change in price
P altered from 1.5 to 2.0, Q changed from 25 to 20
Po = 1.5 and Qo = 25, P1 = 2 and Q1 = 20
Percentage change in quantity = (Q1 – Qo)/ Q1 + Qo = (20 – 25)/ (20 + 25)
Percentage change in quantity = -5/45 = -0.1111
Percentage change in price = (P1 – Po)/ (P1 + Po) = (2 – 1.5)/ (2 + 1.5)
Percentage change in price = 0.5/3.5= 0.1429
Elasticity = -0.1111/0.1429
Elasticity = -0.7777

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2.
a) As stated earlier, Elasticity = Percentage change in quantity divided by percentage
change in price
Price shifts from 1.00 to 2.00 while Quantity moves from 30 to 20
Po = 1.00 and Qo = 30, P1 = 2 and Q1 = 20
Percentage change in quantity = (Q1 – Qo)/ Q1 + Qo = (20 – 30)/ (30 + 20)
Percentage change in quantity = -10/50 = -0.20
Percentage change in price = (P1 – Po)/ (P1 + Po) = (2 – 1)/ (2 + 1)
Percentage change in price = 1/3 = 0.33
Elasticity = -0.20/0.33
Elasticity = -0.67
b)
Elasticity = change in Q% / % change in P
Price changes from 1.00 to 2.00 while quantity shifts from 30 to 20
Po = 1.00 and Qo = 30, P1 = 1.5 and Q1 = 25
Percentage change in quantity = (Q1 – Qo)/ Q1 + Qo = (25 – 30)/ (25 + 30)
Percentage change in quantity = -5/55 = -0.09
Percentage change in price = (P1 – Po)/ (P1 + Po) = (1.5 – 1)/ (1.5 + 1)
Percentage change in price = 0.5/2.5 = 0.20
Elasticity = -0.09/0.20
Elasticity = -0.45

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3.
a). Cross elasticity of demand = percentage change in Quantity demanded of F /
percentage change in Price of S
Percentage change of quantity demanded of F: (Q0 - Q1)/1/2(Q0 + Q1)
Percentage change of quantity demanded of F = (11 - 9)/ (1/2(9 + 11))
Percentage change of quantity demanded of F = 2/ 10 = 0.5
Percentage change in price of F: (Po – P1)/ (1/2(P1 + Po))
Percentage change in price of F = (3 – 2)/ (1/2(3 + 2))
Percentage change in price of F = 1/ 2.5 = 0.4
Therefore Cross elasticity of demand = 0.5 divided by 0.4 = 1.25 (The products are therefore
substitutes of each other given that the cross elasticity of demand is >0)
4.
As stated in the previous question, three a) the two products, Schmeckt Gut Energy Bars and Fly
High Energy bars are substitutes of each other. They are substitutes because their cross elasticity
of demand is greater than zero. In practice, when the price of Schmeckt Gut Energy Bar dropped
from 3$ to 2$ its quantity demanded rose from 10 thousand to 20 thousand per month.
Meanwhile, the quantity demanded Fly High’s energy bars drop from 11 thousand to 9 thousand
per month. As can be seen, consumers preferred the cheaper priced Schmeckt Gut Energy Bar
and therefore shifted from purchasing Fly High’s energy bars which explain the decrease in its
quantity demanded. Whereas that accounts for only a percentage of the new demand for
Schmeckt, it shows that the two products are substitutes of one another (Rui, Liu, & Whinston,

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2017). The other demand for the Schmeckt Gut Energy Bar can be accounted for by the decrease
in price that allows consumers who were unable to buy at a high price but have the ability to now
purchase the cheaper priced energy bar.
Problem C
1.
Introduction of the Schmeckt Besser energy bar should be done assuming that the market is
perfect competition. Even though differentiation in the energy bar sector can set a product on a
different market, the ease with which one product can be substituted for another renders an
assumption of oligopoly risky to undertake. However, the firm should differentiate its product in
order to cut a niche in the market in the long run (Gmelin & Seuring, 2014). During introduction,
the introductory price has to be equal to the marginal cost to ensure that no competition
undercuts the business in term of pricing.
The research department has to put a premium on aggressive marketing to create consumer
loyalty in the brand while creating awareness in its existence. In a perfect competitive market,
the ability of consumers to substitute products means that marketing is not as vital as it would be
in another market. However, the ability to create a brand in the energy bar sector should spur on
the firm.
2.

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The Schmeckt research department should review the cost of marketing needed to successfully
launch a new product in the market. If the costs are deemed to be too restrictive, then the
alternative for franchising ought to be explored (Rankin & Mintu, 2017). Franchising involves
being given the rights to trade under the name of an already established brand that the consumer
recognizes. Apart from saving the money that would have otherwise gone to advertising, the firm
may get to use already established distribution channels and take advantage of an existing
customer base.

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References
Buer, M.C., (2016). ELASTICITY OF DEMAND- Routledge Revivals: Economics for
Beginners, 23(4), 130-159. Retrieved from:
https://www.taylorfrancis.com/books/e/9781351981019/
Esteves, R.B., & Reggiani, C. (2014). Elasticity of demand and behaviour-based price
discrimination, 3, 46-56. Retrieved from:
https://www.sciencedirect.com/science/article/pii/S0167718713001008
Gmelin, H., & Seuring, S. (2014). Determinants of a sustainable new product development, 69,
1-9. Retrieved from:
https://www.sciencedirect.com/science/article/pii/S0959652614000663
Pagoulatos, E., & Sorensen, R. (2017). What Determines the Elasticity of Industry Demand?,
15(2), 1-10 Retrieved from: https://www.degruyter.com/view/j/jafio.2017.15.issue-2/
Rankin, R., & Mintu, W. A. (2017). Challenges in Introducing New Products: A Case Study on
the New Product Development Process, 11, 95-101. Retrieved from:
https://eric.ed.gov/?id=EJ1167328
Rui,H., Liu, D., & Whinston, A. (2017) Allocation and Pricing of Substitutable Goods: Theory
and Algorithm, 26, 767-783 . Retrieved from:
https://onlinelibrary.wiley.com/doi/abs/10.1111/poms.12684