Economics of Management: Market Analysis and Firm Strategy Report

This report delves into the economics of the fruit industry, examining market dynamics, supply and demand, and price elasticity. It analyzes the equilibrium in the market at different time periods, considering shifts in demand and supply curves. The report also explores the strategies of a fruit company, Mildura Fruit Company (MFC), in various market structures, including competitive, monopolistic, and monopoly markets, and the pricing strategies employed in each. Furthermore, it discusses the impact of a government budget deficit and subsequent monetary policy on the company's operations in different regions. The analysis includes the effects of changes in interest rates and consumer behavior on the company's revenue and profit in different market settings, like New South Wales, Queensland and Tasmania.

Running Head: ECONOMICS OF MANAGEMENT
Economics of Management
Name of the Student
Name of the University
Course ID

1ECONOMICS OF MANAGEMENT
Table of Contents
Phase 1.............................................................................................................................................2
Phase 2.............................................................................................................................................5
Equilibrium at t-1..........................................................................................................................5
Equilibrium at t0...........................................................................................................................6
Phase 3.............................................................................................................................................6
Phase 4.............................................................................................................................................7
Reference list...................................................................................................................................9

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Phase 1
For the purpose of this report the chosen industry is fruit.
The demand for the industry is specified as
QD=a−bP
QD specifies demand and P is the price
The supply for the industry is specified as
QS =c +dP
Based on upon the market data demand is obtained as
QD=120 – P
The corresponding supply function is
QS =20+ P
Equilibrium is obtained where demand equals supply
Demand=Supply
¿ , 120−P=20+ P
¿ , P+P=120−20
¿ , 2 P=100
¿ , P= 100
2
¿ 50

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At equilibrium,
QD=120−P
¿ 120−50
¿ 70
QS =20+ P
¿ 20+50
¿ 70
In the specified demand function, own price is the primary factor affecting demand. The
coefficient of price is negative which implies that demand increases with a decrease in price and
decreases with an increase in the price. The intercept of the demand curve depends on the value
of ‘a’ while the slop depends on the value of b. Apart from price, other factors influencing fruit
demand include
Income of the consumers, taste and preferences, demand of the related industry like fruit juice
and others (Fine 2016).

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0 20 40 60 80 100 120
20
40
60
80
100
120
140
f(x) = − x + 120
Demand
Quantity
Price
Demand elasticity one price above the equilibrium price
The price elasticity of demand at the price interval by the mid-point method of elasticity
Elasticity ( eP ) = dQ
dP × PAverage
QAverage
P Q dQ dP dQ/dP (Q2+Q1)/2 (P1 +P2)/2 Pavg/Qavg Elasticity
50 70 -10 10 -1 65 55 0.846153846 -0.84615
60 60
The estimated price elasticity at one price above the equilibrium level is -0.84
Demand elasticity one price below the equilibrium price
P Q dQ dP dQ/dP (Q2+Q1)/2 (P1 +P2)/2 Pavg/Qavg Elasticity
50 70 10 -10 -1 75 45 0.6 -0.6
40 80
The estimated price elasticity at one price below the equilibrium level is -0.6.

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Phase 2
Equilibrium at t-1
At t-1, there is an increase in industry demand. Specifically demand curve shifts to the right. The
supply however does not change in that period. The new equilibrium is obtained where new
demand curve intersects the existing supply curve (Baumol and Blinder 2015).
Figure 1 : Equilibrium at t-1
In the next period, with an increase in the industry demand the demand curve from DD to D1D1.
The supply curve remains at SS. At time t-1, the equilibrium shifted from E to E1. The high
demand increases both equilibrium price and quantity (McKenzie and Lee 2016). Equilibrium
price increase to P1 while equilibrium quantity in the market is obtained as Q1.

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Revenue is obtained by multiplying price with volume of sales. The new revenue is (P1
*Q1).
Equilibrium at t0
In the next period that is in t0, industry supply increases shifting the supply curve to the right.
The new equilibrium is obtained from the demand curve at t-1 and the new supply curve (Pouw
2017).
Figure 2: Equilibrium at t0
At time t0, increase in industry supply shifts the supply curve right to S1S1. The new equilibrium is
at E2, where new supply curve S1S1 cuts the demand curve at time t-1. Corresponding to the new
equilibrium price decreases to P2 while equilibrium quantity increases to Q2. The new revenue is
obtained as (P2*Q2).
Phase 3

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The name of the firm is Mildura Fruit Company (MFC). It is Australia’s largest packer
and exporter of fresh Citrus. The company packs and sells fruits to Mildura and other regions of
Australia. The company has six directors. Sunbeam Foods Group Limited solely owns the
company (mfc.com.au 2018).
In the competitive market of New South Wales, the company will charge a price that
equals marginal cost of production. In the competitive market though the firm can enjoy a
supernormal profit in the short run but in the long run, there remains only normal profit (Cowen
and Tabarrok, 2015).
In Queensland facing with monopolistic competition the company charge price
determined from the profit maximization condition of marginal revenue equals marginal cost.
Like NSW, here also firm can enjoy short run profit. Barrier free entry of new firms eliminate all
the short run profit leaving only normal profit in the long run industry (Hill and Schiller 2015).
In the monopoly market of Tasmania, being the single seller the company has complete
control over the market price it can easily charge and maintain the profit maximization price
obtained as MR =MC (Goodwin et al. 2015). The monopolist firm then in the long run can enjoy
a supernormal profit with highly restrictive entry in the market.
The main factor for difference in price for different market is difference in the industry
demand and market power of the operating firms.
Phase 4
Deficit in the government budget caused by increase in government spending creates
inflationary pressure in the economy. In order to reduce inflation, counteractive monetary policy

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is undertaken in the form of increase in interest rate (Bernanke, Antonovics and Frank 2015).
The budget deficit thus has an effect of raising the interest rate.
An increase in interest rate means increase in the cost of borrowed capital. Investors now
have to pay a higher return on the borrowed fund. This discourages private investment results in
a decline in private investment.
The high interest rate means a higher opportunity cost holding money. Therefore, in
response to increased interest rate household’s saving increases to get a higher return. This
reduce the available income for consumption leading to a reduction in private consumption
(Goodwin et al. 2015).
The business in NSW sells product only to consumer who work in private sector. Decline
in private consumption causes a decline in the demand of Citrus for the company. As a results
revenue and profit from business unit in NSW decreases. In order to increase demand, the
company might reduce their price or might try to sell their product to other group of consumers.
In Tasmania, as the firm is planning to invest $X, it will now face a higher cost of
investment. In order to recover the cost, it will charge a higher price than earlier.
In Queensland, the business remains relatively unaffected. As the company sells only a
small proportion to the private sector citizen reduced private consumption does not have much
effect on sales and profit.

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Reference list
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill
Higher Education.
Cowen, T. and Tabarrok, A., 2015. Modern Principles of Microeconomics. Palgrave Macmillan.
Fine, B., 2016. Microeconomics. University of Chicago Press Economics Books.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in
context. Routledge.
Hill, C. and Schiller, B., 2015. The Micro Economy Today. McGraw-Hill Higher Education.
McKenzie, R.B. and Lee, D.R., 2016. Microeconomics for MBAs. Cambridge University Press.
Mfc.com.au. (2018). Our Story | Mildura Fruit Company - Packer & Exporter of Fresh Citrus.
[online] Available at: http://www.mfc.com.au/en/our-story/ [Accessed 25 May 2018].
Pouw, N., 2017. An Introduction to Gender and Wellbeing in Microeconomics. Routledge.