Economic Principles and Decision Making: ECON6000 Module 3 Assignment

This assignment solution addresses key economic principles and decision-making concepts, focusing on a case study involving the introduction of a new energy bar. The student analyzes elasticity of demand (own price, income, and cross-price), calculates price elasticity using both point and midpoint methods, and determines how to maximize revenue. The assignment also explores market structures (perfect competition, monopoly, and imperfect competition), the impact of market structure on business strategy, and provides recommendations for successful market entry. The student examines how cross-price elasticity can determine if two products are substitutes or complements. Furthermore, it emphasizes the importance of understanding market dynamics, including competitor analysis, for effective decision-making. The assignment demonstrates the application of economic theory to real-world business scenarios, providing a comprehensive analysis of the challenges and opportunities in introducing a new product.

Running Head: ECONOMIC PRINCIPLES AND DECISION MAKING
Economic Principles and Decision Making
Name of the Student
Name of University
Course ID
Student ID

1ECONOMIC PRINCIPLES AND DECISION MAKING
Table of Contents
Problem A........................................................................................................................................2
Answer to 1..................................................................................................................................2
Answer to 2..................................................................................................................................3
Problem B........................................................................................................................................3
Answer to 1..................................................................................................................................3
Answer to 2..................................................................................................................................4
Answer to 3..................................................................................................................................5
Answer to 4..................................................................................................................................6
Problem C........................................................................................................................................7
Answer to 1..................................................................................................................................7
Answer to 2..................................................................................................................................8
References list..................................................................................................................................9

2ECONOMIC PRINCIPLES AND DECISION MAKING
Problem A
Answer to 1
Elasticity is one vital aspect in determining market operation of a business. Elasticity of
demand captures the proportionate change in demand with respect to proportionate change in
own price, income or price of related product (substitute and complements). The percentage
change in demand with respect to proportionate change in own price, it is called own price
elasticity of demand (Baumol & Blinder, 2015). Response of demand with respect to income is
known as income elasticity. Relative change in demand with respect to change in prices of
related products is called cross price elasticity of demand.
Concerning introduction of Schmeckt Besser energy bar knowledge of all the three types
of demand elasticity are crucial. In determining price, own price elasticity has an important role
to play. If price elasticity of demand is found to be relatively elastic in nature, then an increase in
price reduces demand largely. In this situation, lower price is beneficial for company as it raises
revenue (Varian, 2014). If observed demand is relatively inelastic then an increase in price
contributes to increase in revenue. Using the information of own price elasticity the company can
decide price of its Besser energy bar.
The knowledge of income elasticity will help the company to evaluate tendency of local
people to change their demand for energy bar as income change. The higher elasticity indicates
preference of local people towards energy bar (Nicholson & Snyder, 2014). In determining
pricing strategy, knowledge of cross price elasticity should also be known. The cross price
elasticity helps to understand the whether the existing energy bars act as a substitute or
complementary to Besser energy bar.

3ECONOMIC PRINCIPLES AND DECISION MAKING
Answer to 2
In order to introduce the new product successfully, the company should have sufficient
knowledge regarding demand and elasticity. It is responsibility of the research department to
collect historic data related to movement of demand in line with changes in price of energy bars,
income and price of other available energy bars (Friedman, 2017). A lower own price and cross
price elasticity and higher income elasticity indicates a favorable environment for introducing the
new product.
Problem B
Answer to 1
Price ($per energy bars) Quantity Demanded (thousand per day) Revenue
1.00 30 30.00
1.50 25 37.50
2.00 20 40.00
2.50 15 37.50
3.00 10 30.00
From the above table, price that maximizes total revenue is obtained as $2.00. The maximum
revenue corresponding to this price is $40.
Price elasticity of demand ( point elasticty method ) = Percentage change ∈Quantity demanded
Percentage change∈Price
¿ Change∈quantity demanded
Change∈ Price × Price
Quantity demand
¿ Q2−Q1
P2−P1
× P1
Q1

4ECONOMIC PRINCIPLES AND DECISION MAKING
¿ ( 15−20 )
( 2.50−2.00 ) × 2.00
20
¿ −5
.50 × 1
10
¿−10 ×0.1
¿ 1
Answer to 2
a)
Elasticity of demand when price increases from $1.00 to $2.00 is given as
Price elasticity of demand ( Mid Point elasticty method ) = Percentage change ∈Quantity demanded
Percentage change∈ Price
¿ Change∈quantity demanded
Change∈ Price × Average Price
Average Quantity demand
¿ Q2−Q1
P2−P1
×
Q2 +Q1
2
P2 +P1
2
¿ 20−30
2.00−1.00 ×
2.00+1.00
2
20+30
2
¿ −10
1.00 × 1.5
25
¿−10 ×0.06
¿−0.6

5ECONOMIC PRINCIPLES AND DECISION MAKING
b)
Elasticity of demand at a price of energy bars equals $1.50 is obtained as
Price elasticity of demand ( Mid Point elasticty method ) = Percentage change ∈Quantity demanded
Percentage change∈ Price
¿ Change∈quantity demanded
Change∈ Price × Average Price
Average Quantity demand
¿ Q2−Q1
P2−P1
×
Q2 +Q1
2
P2 +P1
2
¿ 25−30
1.50−1.00 ×
1.50+1.00
2
25+30
2
¿ −5
0.50 × 1.25
27.5
¿−10 ×0.0454
¿−0.45
Answer to 3
a)
It is observed by the research department of Schmeckt Gut that a decline in the price of
Schmeckt Gut Energy Bar is associated with a decline in Fly High’s energy bars sold from 11 to

6ECONOMIC PRINCIPLES AND DECISION MAKING
9. From this cross price elasticity between Schmeckt Gut’s Energy bar and that of Fly High’s
energy bar can be computed as
Cross Price elasticity of demand ( Mid Point elasticty method ) = Percentage change∈Quantity demanded(QX )
Percentage change ∈Price (PY )
¿ Change∈quantity demanded
Change∈ Price × Average Price
Average Quantity demand
¿ QX 2−QX 1
PY 2−PY 1
×
PY 2+PY 1
2
QX 2+QX 1
2
¿ 9−11
2.00−3.00 ×
2.00+3.00
2
9+11
2
¿ −2
1.00 × 2.5
10
¿−2× 0.25
¿ 0.5
Answer to 4
The sign of cross price elasticity helps to determine whether two products are substitutes,
complements, or independent. A positive cross price elasticity is obtained between Schmeckt
Gut’s energy bar and Fly High’s energy bars. This implies demand for Fly High’s energy bars
moves in the same direction as price of Schmeckt Gut’s energy bar does. That is an increase in
price of Schmeckt Gut’s energy bar increases demand for Fly High’s energy bar (Varian, 2014).
This is because people tend to substitute Schmeckt Gut’s energy bar with that of Fly High’s

7ECONOMIC PRINCIPLES AND DECISION MAKING
energy bar. Reverse is the case when there is a decline in price of Schmeckt Gut’s energy bar.
This indicates these two products are substitutes to each other.
Problem C
Answer to 1
Business strategy for entering in a new market or introducing new product is subject to
particular market structure. The three possible form of market structure include market with
perfect competition, monopoly market and market with imperfect competition. The different
form of market differs in terms of presence of number of competitors and other features. If the
market structure is perfectly competitive, then company experiences presence of many
competitors as against only one, two and few competitors (Cowell, 2018). If the market structure
is perfectly competitive, then Schmeckt Gut will not face any entry barrier and can easily enter
the market. The monopoly market describes a situation where Schmeckt Gut is the only seller in
the area. Being the only seller in the market, the company enjoy high market power and need to
worry about action of its competitors. The company however might face significant difficulty in
entering in a market with imperfect competition (Hill & Schiller, 2015). In this form of market,
existing seller enjoying a large market share makes it difficult for new entrants to enter the
market.
Schmeckt Gut is likely to experience imperfect competition. The market structure can be
either a monopolistic competition or an oligopoly. For entering and surviving in such a market,
the company needs to differentiate its product from its competitors. The Besser energy bar
should have some additional features that is different from the existing energy bars (Nicholson &

8ECONOMIC PRINCIPLES AND DECISION MAKING
Snyder, 2014). The company can smoothly enter the market only with a new and innovative
product.
Answer to 2
It is necessary for the company to be kept well informed about the market structure in
which it is attempting to enter. The researchers should investigate the existing number of
competitors in the market. This will help to understand the extent to competition in the market
and specific form of market. After determining the specific market structure, focus needs to be
given on type of products sold in the market, specific strategy of the competitors along with
existing share of the rivals (Varian, 2014). This information are crucial to understand the correct
form of market and strategy of entering the market.

9ECONOMIC PRINCIPLES AND DECISION MAKING
References list
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University
Press.
Hill, C., & Schiller, B. (2015). The Micro Economy Today. McGraw-Hill Higher Education.
Nicholson, W., & Snyder, C. (2014). Intermediate microeconomics and its application. Nelson
Education.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International
Student Edition. WW Norton & Company.