Management Economics Report: Sales, Elasticity, and Pricing Analysis

This report delves into the core concepts of management economics, focusing on sales prediction, elasticity analysis, and pricing strategies within the context of TSG Pharma. The report begins by examining the prediction of sales changes based on population elasticity, demonstrating how a rise in population can affect sales revenue. It then analyzes price elasticity, illustrating how price changes impact demand and revenue, and discusses the significance of income elasticity for managerial decision-making. The report includes calculations of key financial metrics such as total revenue (TR), average revenue (AR), marginal revenue (MR), total cost (TC), average cost (AC), marginal cost (MC), and profit, along with the determination of the profit-maximizing output. Furthermore, the report covers the identification of cost-minimizing and profit-maximizing price/output combinations, and it concludes with a discussion of various economic systems, such as monopoly, oligopoly, and perfect competition, supported by relevant examples. The assignment offers insights into making informed business decisions, and strategies for managing costs and maximizing profits.

Management economics
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Table of Contents
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
A. Prediction of change in sales.......................................................................................................3
B. Comment on rise or fall in revenues...........................................................................................4
C. Elasticity of income and its importance for management...........................................................5
D. Calculation of TR, AR, MR, TC, AC, MC and profit.................................................................7
4. Profit and output combination of maximum profit......................................................................8
F. Profit-maximising and average cost minimising price/output combination..............................10
PART B...............................................................................................................................................11
CONCLUSION..................................................................................................................................15
REFERENCES...................................................................................................................................16
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INTRODUCTION
Economics refers to the process of production, manufacturing, distribution and consumption
of offered products and services. In every nation, businesses produce various types of goods to meet
their consumer demand by delivering required goods. Establishments set their product prices by
taking into account two elements that are demand and supply. As per the law of demand, both the
prices and demand are adversely related to each other, henceforth, rise in prices results in declining
demand or vice-versa. Although, there is negative relationship exists between demand and prices,
but still, by what percentage demand will be decrease with the increase in prices is greatly depends
upon the elasticity of demand. Therefore, this assignment report demonstrates various types of
elasticity such as elasticity of demand, income elasticity and so on to make more viable and
stronger decisions. Along with this, the project will also determine the most appropriate price/output
combination at where cost is minimum and profit is maximum. Despite this, second part of the
assignment demonstrates various types of economic system that are monopoly, oligopoly, perfect
competition and others with suitable examples of either the national or international company for
evidence. It will enable assist reader to gain an in-depth understanding of different kind of
economies, characteristics and pricing decisions as well.
TASK 1
According to the scenario, TSG Pharma manufactures an antibiotic product, TSG caplets to
deliver superior quality services to the public. Now, firm wants to predict or estimate changes in
sales for the upcoming period so as to identify that whether price will goes increase or decrease in
future.
A. Prediction of change in sales
Elasticity of sales in connection to the change in population entails the relationship between
two variables that are population and sales revenue as well. It helps businesses to identify that by
what percentage sales will go upward or downward with the increase or decrease in local population
(Sekizaki, Nishizaki and Hayashida, 2016). It can be computed using following formula,
represented hereunder:
Elasticity of sales = Percentage (%) change in sales/ Percentage (%) change in population
Cited scenario demonstrates that elasticity of sales with respect to the local population is 0.8.
It means that each % age increase in population will maximize total sales revenue by 0.8%. In other
words, if population rises by 100% then with the high level of population, turnover will go up by
80%. The main reason behind this is with the increase in overall population, public demand will be
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increase as more and more public will demand company’s products to meet their expectations
(Wang, Ibarra and Pantelides, 2016). However, on the other side, if population goes decrease over
the period, then it will results in decrease in demand.
Scenario presented that if population goes increase from 130,000 to 140,000 then % change
in population will be computed as follows:
% change in popn = New population – Old population/(Old population)*100
= (140,000 – 130,000)/130,000 *100
= 7.69%
Elasticity of sales = Percentage (%) change in sales/ Percentage (%) change in population
0.80 = % age change in sales/7.69
% age change in sales = 7.69*0.80
% age change in sales = 6.15%
Thus, as per the analysis, it has been founded that with the increase in local population by
7.69% from 130,000 to 140,000, TSG Pharma manufactures product price will be increased by
6.15%. It is because, now, more consumers will desire to buy TSG caplets to meet their
expectations. Rise in sales will help firm to maximize their revenues and result in high profitability.
Thus, company can maximize their operational performance and strengthen their competitive
position to gain sustainable advantage.
B. Comment on rise or fall in revenues
Elasticity of prices, shortened to EP indicates that whether quantity of sales item wills goes
upward or downward with the decrease or increase in product prices. As stated earlier, that law of
demand entails that with the inflated prices, consumer demand goes decrease (Sandoval and Carpio,
2016). The reason behind this, is at higher price, less proportion of overall population will be able to
buy TSG pharma manufactures’s products may be due to less affordability, employment level,
saving and disposable income as well. EP always ranges between the value of zero to one, zero is a
sign of inelastic demand, however, 1 indicates perfect elastic. On the other side, a product that
prevails between these range indicates more or less elastic goods.
Price elasticity of demand (Ep) = % age change in demanded quantity/(% change in product price)
Ep = - 1 < Ed < 0
Scenario presented that current price of the item is 7.50 GBP for each pack of TSG caplets at
a price elasticity of -0.85. It means that 1% increase in price will decrease market demand by
0.85%. Now, managers are concern that if they raise prices to 8.50 GBP, then % age change will be
as follows:
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% change in price = (New price – old price)/Old price *100
= (£8.50 - £7.50)/(£7.50)*100
= (£1)/ (£7.50)*100
= 13.33%
In the given case, if price move upward by 13.33% then its impact on overall demand will
be as follows:
-0.85 = (% age change in demanded quantity)/13.33%
(% age change in demanded quantity) = (-0.85*13.33)/100
= -11.33%
Will revenue rise or fall
By taking into account the mentioned results, it can be seen that if TSG Pharma
manufactures’ raise prices by 13.33% then its market demand will move downward by 11.33%.
Thus, decrease in demand will decrease overall revenue of the firm and impact operations adversely
(Eamon, B and et.al., 2016).
On the other hand, if price elasticity is -1.1 then its impact on quantity demanded will be as
follows:
-1.1 = (% age change in demanded quantity)/13.33%
(% age change in demanded quantity) = (-1.1*13.33)/100
= -14.663%
After taking into account the results of both the situations, it can be seen that if Ep is below -
1, % change in quantity demanded is comparatively lower than % change in prices. However, if Ep
goes beyond the -1, then prediction regards to fall in demand is comparatively greater to 14.663%.
It indicates that consumers are highly price sensitive and little bit increase in prices will bring
extreme level of decline in market demand and have a huge impact upon TSG Pharma
manufactures’s business operations. It suggest managers that they must set balanced prices for their
offerings so that an effective balance can be maintained in market demand.
C. Elasticity of income and its importance for management
In economics, elasticity of income helps to measure the responsiveness of overall product
demand with the increase or decrease in people income. In general, demand often has positive
relationship with the income, as at higher employment status, people prefer to buy firm’s offerings
to meet their expectations, however, poor people are not demand goods just because of lack of
affordability (Hungerman and Rinz, 2016). Income elasticity is used by the establishments to
examine and evaluate the sensitivity of consumer demand with the volatile income level, can be
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represented as follows:
Ey = % change in demand/% change in income
It may be of different types that are discussed here as under:
Negative: For inferior quality of goods, income elasticity of demand will be negative. The
reason behind this is with the higher prices, consumer prefers to purchase superior quality goods
and services, henceforth, decline demand for inferior quality products (Bogart, 2016).
Positive: It is associated with the normal quality goods, in such case, if income elasticity is
more than 1, than it indicates that goods is of luxurious quality. However, on the other hand, if
income elasticity is below the value of 1, then it will be a necessity goods (Income elasticity of
demand, 2016).
Zero: It indicates that income is not associated with the increase in income and will not
bring any change in demand.
In the cited situation, Ey is given to 0.75 indicates that if person’s income goes up by 100%
then he will demand excessive quantity of goods by 75% or vice-versa.
Importance of income elasticity of demand
It is important for the managers to measure their income elasticity due to the following
reasons, enumerated hereunder:
Forecasting demand: One of the most importances of income elasticity is it helps to
anticipated or forecast future demand by measuring its sensitivity in connection with the income
volatility (Suttle, 2016). With the help of this, TSG Pharma manufactures’s managers can prepares
an excellent production plan by identifying that how much quantity of goods and services they will
need to produce to meet market demand. Thus, it is very helpful in making viable economic
decisions.
Useful for goods categorization: Another significant aspect of Ey is it helps to classify
goods into normal, inferior or luxurious goods. For instance, if Ey is positive indicates that goods
are normal, however, negative Ey is a sign of inferior goods quality. Referring stated scenario, it is
positive to 0.75 exhibits that TSG Pharma manufacturer’s items are normal or necessity goods.
Marketing strategy: It is also helpful for marketing manager to design an excellent
marketing plan for sales maximization (Karier, 2016). For instance, companies who produce luxury
goods need to put high efforts on digital marketing to reach high-society profile people, however,
for lower-income group, firm needs to pay much focus on advertisement and other promotional
strategies.
Trade cycle: it is also helpful to assess trade cycle as for necessity goods, Ey is low. It
indicates that during the period of prosperity, consumer will be willing to purchase superior quality
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or luxurious goods hence these sellers will be able to get extreme level of benefits. On the contrary
to this, firms who are delivering normal goods will be adversely affected due to less demand.
D. Calculation of TR, AR, MR, TC, AC, MC and profit
TSG Pharma manufactures make TSG caplets and charge prices in return for the goods
delivered from the consumers. As per the stated scenario, functions for total cost and revenue is
mentioned below:
TR = $800Q - $0.2Q2
TC = $38,000 + $2,50Q + $0.2Q2
According to this, MR and MC can be presented as follows:
MR = (TR / Q) = $800 - $0.4Q
MC = (TC/Q) = $2,50 + $0.4Q
Output
(Q)
Price
(P)
Total
revenue
(TR)
Marginal
Revenue
(MR)
Total
cost
(TC)
Marginal
cost
(MC)
Average
Cost
(AC)
Total
profit (TP)
Marginal
profit
(MP)
0 800 0 800 38000 250 0 -38000 550
100 780 78000 760 65000 290 650 13000 470
200 760 152000 720 96000 330 480 56000 390
300 740 222000 680 131000 370 436.67 91000 310
400 720 288000 640 170000 410 425.00 118000 230
500 700 350000 600 213000 450 426.00 137000 150
600 680 408000 560 260000 490 433.33 148000 70
700 660 462000 520 311000 530 444.29 151000 -10
800 640 512000 480 366000 570 457.50 146000 -90
900 620 558000 440 425000 610 472.22 133000 -170
1000 600 600000 400 488000 650 488.00 112000 -250
According to the given table, it can be seen that prices of the produce is continuously
declining with the increase in quantity. Higher the market demand enable TSG Pharma
manufactures to generate increased revenues. With the declining in revenues, marginal revenue per
unit also has been decreasing that indicates that how change in demand of one quantity will
influence overall revenue of the firm. On the other side, with the high level of production, average
cost per unit of caplets came down because of benefits of economies of scale. As now, total cost will
be allocated to more number of units results in less cost on each unit (Amir, R and et.al., 2016). But
after a fixed volume, AC also moves upward with the more production level. As in the cited case,
TSG manufacturer will incur high AC after 500 units to 433.33 and so on. On the other side,
marginal cost (MC) per unit shows a rising trend on a consistent basis. It shows that TSG Pharma
manufactures will incur more expenditures to produce one additional unit of caplets. At the zero
level of production, company will incur a loss of 38000 dollar. Fixed cost is the only reason behind
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this loss. This are the expenditures which will incur either at zero level of production or also does
not change with the increase in output level. In the cited case, TSG Pharma manufactures is
incurring a fixed expenditures worth 38000 dollar. With the increase in quantity sold, total profit
(TP) goes increase which is a good sign of business performance (Zhou and Huang, 2016).
However, if we look at the marginal profit (MP), then we can found that it shows a declining
trend. Declining MR and rising MC are the only reason behind decrease in MP. Till the level of 600
units, MP is positive which indicate that MR is greater than MC (MR>MC). In the given situation,
MR is 560 dollar whilst MC is 490 dollar resulted favourable MP. However, after this level, MP
shows negative values because of higher MC as compare to MR (MC>MR) (Wang and Zhang,
2016). It is a poor sign of business performance as TSG Pharma manufactures will incurred higher
expenditures to produce additional unit of caplets and generate less revenues. According to the case,
BEP (Brek-even point) at where both the MR and MC will be equal comes under the range of 600
to 700 units at zero marginal profit.
4. Profit and output combination of maximum profit
Being a commercial establishment, TSG Pharma manufacturer’s aims at gathering maximum
return through their operations. Henceforth, it is essential for the manager to identify that level of
sales, where profitability is highest with having largest revenue and lowest cost.
Interpretation: After taking into account following results, following decisions can be made, given
below:
 With the increase in production volume, MR shows downward trend on a consistent basis
which exhibits that TSG Pharma manufacturer’s generated declined revenue on per
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additional unit of caplets.
 On the other side, Marginal cost shows a rising trend demonstrating that company need
more amount to product per unit of production.
 Average cost shows a volatile trend in “U” shape, as initially, it shows a declining trend,
came to lowest point and then rises upward direction with excess unit.
 Production output at where AC is lowest, MC cut it and moves upward. In the given
situation, at 400 sales unit, AC is minimum to 425 dollar. At this level, selling price is 720
dollar, thus, price/output combination at lowest AC is $720/400 units.
 After this point, AC started to increase with more units of production. As per the case study,
it can be seen that after 400 units, AC of the firm will be increase to $426, $433.30 and so
on.
 As per the presented graph, it can be seen that MC cuts MR between the ranges of
production units of 600 to 700. It is the point of maximum profitability, also called BEP
point which demonstrates that TSH Pharma manufacturers has effectively utilized their
business resources to achieve the point of maximum capacity utilization (Economic
optimization, 2016). At this point, MP of the firm will be nil by having equal MR and MC.
In the situated case, at 600 units, MP is 70 dollar whereas at 700 units, MP is -10.
Henceforth, it clearly shows that maximum profitability point will definitely prevails
between the ranges of both the level, thus, it will be more than 600 but less than 700. At that
level, price of caplets will be between the range of $680 to $660.
Output
(Q)
Price
(P)
Total
revenue
(TR)
Marginal
Revenue
(MR)
Total
cost (TC)
Marginal
cost
(MC)
Average
Cost (AC)
Total
profit (TP)
Marginal
profit (MP)
681 663.8 452047.8 527.6 301002.2 522.4 442.00 151045.6 5.2
682 663.6 452575.2 527.2 301524.8 522.8 442.12 151050.4 4.4
683 663.4 453102.2 526.8 302047.8 523.2 442.24 151054.4 3.6
684 663.2 453628.8 526.4 302571.2 523.6 442.36 151057.6 2.8
685 663 454155 526 303095 524 442.47 151060 2
686 662.8 454680.8 525.6 303619.2 524.4 442.59 151061.6 1.2
687 662.6 455206.2 525 304143.8 525 442.71 151062.4 0
688 662.4 455731.2 524.8 304668.8 525.2 442.83 151062.4 -0.4
689 662.2 456255.8 524.4 305194.2 525.6 442.95 151061.6 -1.2
690 662 456780 524 305720 526 443.07 151060 -2
700 660 462000 520 311000 530 444.29 151000 -10
 Taking into consideration the table, it can be seen that at 687 units, MR and MC are
approximately equal and indicates null MP. Henceforth, it will be the point of optimum and
maximum resource utilization that denotes efficient production level.
 After accomplishment of maximum capacity utilization (BEP) point, MP will shows
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negative yield because of excessive MC and less MR. Referring the case study, from 700 to
1000 units, MP shows negative profitability to $10, $90, $170 and $250.
F. Profit-maximising and average cost minimising price/output combination
In the market economy, companies chose to select that combination at where average-cost
per unit of item is lowest and profit is maximum. It is because, at that level, companies will be in
the position of maximum resource utilization and highest return or yield on sales.
Cost function (TC) = $800Q - $0.2Q2
Revenue function (TR) = $38,000 + $2,50Q + $0.2Q2
MC = $800 - $0.4Q
MR = $250 + $0.4Q
MC = $800 – (0.4*687 units)
= $800 – ($274.8)
= $525
MR = $250 + $0.4Q
= $250+ (0.4*687)
= $525
Maximum profit = Zero MP = (MR = MC)
MP = ($525 = $525)
= Nil
Thus, as per the equation, it becomes clear that at 687 units, both the MR and MC is equal
and profit is nil.
PART B
KFC stands for Kentucky Fried Chicken is regarded as the largest food restaurant chain
owned and controlled by an entrepreneur. It was founded by Colonel harland Sanders which exist in
Harrisburg. This place offers fried chicken from its roadside restaurant initially which further
became a big brand in attracting wide number of customers. KFC has become prominent figure in
the cultural history of the country in setting up their unique identity (Bigne, 2016). This is
recognized as one of the biggest fast food chain which further expanded in the international food
outlet in England and certain major countries. The current business entity has experienced success
nationally as this will lead an entity to lure the interest of various customers. This food chain started
at small scale in domestic regions that extended to the overseas section. The current has raised
greater importance by ensuring its place among the largest restaurant chain in the United States. The
KFC has founded in the early 1952 in order to maintain the Dominican in providing their unique
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quantity and quality of products or services. The rise of this business in the form of sander Court
and cafe that generally served variety of goods and services to all the travellers who visited this
place as it the location of this lace is in the salt lake city. It is located in the front location to please
the interest of various customers by serving variety of products and retain them for long time (Wu,
2016). This business gain popularity in the fast food industry by segmenting their existing market in
form of different sectors in order to meet the needs of their customers by offering franchisees. The
offering of franchisees to all across the world will help in achieving the needs and expectations of
different kinds of customers.
Initially the KFC operates in the monopoly market structure by providing unique concept of
products or services offered to different set of customers. The variety of products offered by this
entity in order to marked their foot on the existing market. The monopoly can be created by offering
unique products at different prices other than the business entity exist in the market. It is regarded as
one of the important concept used in the market that defines the overall market by framing their
structure in order to operate successfully (Mihăilă, 2016). The monopoly can be created by the
business in the existing economy having different characteristics such as no substitution of
products, lack of competition, no comparison of the price. The term monopoly is far more different
from the terminology monopsony in which there is only existence of one buyer who offer one
product or service. The current market structure will focus on the normal business aspects of
economic competition which provides fundamental for initiating industrial organization and
economic regulations. It is regarded as that kind of structure in which single seller dominates the
existing market by offering products with not sort of competition in form of duplicate's products.
There are various characteristics of the monopoly market structure which will support an entity in
order to operate their business successfully which are given as below:
Single seller- In this form of market the KFC is operated as single owner who provides
products or services in order to catch the interest of different customers. The seller in this market
will produce different variety of goods (Beck, Stewart, Sims and Jennings, 2016). The market will
be ruled by one seller as all rules and regulations will be framed by these single owner. The single
owner will handle the overall market as there is existence of any other sellers who will give tough
fight to this entity.
Price discrimination- The power of ruling the existing market is in the hands of the
monopolist who can changes their prices offered for different variety of products. The prices can be
amended by increases or decreases the existing prices without seeking advice from overall industry.
The decision of developing the prices of products or services will help in gaining the trust of
different individuals.
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Lack of substitutes- The substitutes of the products refers to the availability of same
quantity and quality of products exist in the market which is easily changed the behavior of all
customers. The nature of customers gets changed by getting same products in affordable prices
which gives tough fight to the existing products in order to affect the current products or services
offered by an enterprise. The substitutes are removed in order to maintain the existence of this entity
among the wide set of customers who will help in achieving the primary target of the firm. There is
no existence of any substitute products other than KFC as the quantity and quality served by this
entity is phenomenon.
Entry barriers- The strong firm in the current market will impose restriction on new firm to
make entry in the existing market (Chavas, 2016). The entry will be restricted by placing higher
entry costs which indirectly intervene in the decision of new firm in entering new market. The entry
barriers imposes on the entry of new firm as introduction of new firm in this market will break the
situation of monopoly. The monopolist tries to eliminate several industries from the existing market
as their primary focus is on safeguarding itself from external pressures which affects their existing
financial and market positions.
Long run profit- The market owner or monopolist will earn abnormal profit while
operating in this particular market structure. The reason behind earning of abnormal profit as there
is no kind of fear of competitive seller (Bigne, 2016). This achievement of abnormal profit is due to
the lack of competitive seller who will affect the existing business performance of an enterprise.
The constant earning of profit in the long run is due to maintenance of market position on the top as
the owner has no fear of affecting their current business. The owner operating in the existing market
are strengthened their business as they have no fear of losing their position as top position are
enjoyed by the single owner.
Short term loss- An individual operating in the monopoly market structure misunderstands
with the terms that this market will not suffer with loss in this form of market structures. This myth
is not correct as the monopolist will also suffer with loss for short term period due to lack of support
from wide number of buyers. The business operated by an entity for the betterment of their
customers as products offered in order to meet their needs. The loss can be incurred in this market
structure due to stop producing products by changes takes places in the demands of different
customers in the overall market.
Demand curve- The demand curve tends to be declines by showing downward position
towards the right. The monopoly market structure will show the declining curve of commodity of
the firm is less than compared to the price elastic. This curve shows declining performance as it has
complete control on the supply of the goods or services in relation with the demands and wants of
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