Economics for Managers: Price Elasticity of Demand and Oligopoly

This report examines the concept of price elasticity of demand, its various types (perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, and unitary elastic), and its significance for businesses, governments, and monopolists. It explores how price elasticity influences pricing decisions and provides examples from economic journals, including studies on energy services and gasoline. The report then delves into oligopoly market structures, outlining their characteristics such as entry barriers, interdependence, kinked demand curves, and non-price competition. It illustrates these concepts with the car manufacturing industry as a case study, analyzing market dynamics, competitive strategies, and the impact of globalization. The report concludes by emphasizing the importance of understanding these economic principles for effective management and strategic decision-making.

Running head: ECONOMICS OF MANAGERS
Economics for managers
Name of the Student
Name of the University
Author Note

ECONOMICS OF MANAGERS
Table of Contents
Answer to question a).................................................................................................................2
Answer to question b)................................................................................................................7
Answer to question c)...............................................................................................................11
References list:.........................................................................................................................15

ECONOMICS OF MANAGERS
Answer to question a)
The concept of price elasticity of demand is understood widely and the most common
measure of the sensitivity of the consumers to price is known as the price elasticity of
demand. Price elasticity measures the proportionate changes in the demand for any particular
product due to change in its price. Classification of elasticity can be done as elastic and
inelastic where elastic occurs when the elasticity is more than negative and inelastic when the
elasticity is close to zero or smaller. Goods or the products having fewer substitutes and are
required for every consumption tends to have lower elasticity compared to the goods that not
essential and have wide range of substitutes. Price elasticity of demand can be computed by
dividing the percentage change in quantity demanded due to percentage change in price
(Gouel & Laborde, 2018).
There are five different types of price elasticity that can be represented on the demand
curve. Such elasticity comprise perfectly elastic, perfectly in elastic, relatively elastic,
relatively inelastic and unitary elastic.

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The upper portion of the demand curve represents relatively elastic demand as an
increase in price would cause demand to change by larger amount. On other hand, lower
portion of demand curve represents relatively inelastic demand as increase in price would not
change demand by significantly. Different types of price elasticity can be explained
individually (Moser 2016).
Perfectly elastic demand- Under this, a small change in price would cause an
indefinite change in the quantity demand. However, such scenario does not occur in reality.
The graph tends to be a line running parallel to quantity axis.
Relatively elastic demand- Any proportionate change in price causes
demands to increase by larger percentage than increase in price. The demand curve
representing the relatively elastic demand is flatter as shown in the diagram below.
P
Q
D
Q11 Q2 Q31
D
P1
Po
Q1 Q2
2

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Unitary elastic- Any percentage change in price would cause the demand of product
to change by same proportion. This type of elasticity barely exist in reality.
Perfectly inelastic demand- Any change in price would not impact the quantity
demanded and irrespective of price level, demand will remain constant.
Relatively inelastic demand- Any proportionate change in price would cause the
demand to increase by lower percentage that increase in price. It can be represented by the
graph below:
Q
P
P
P1
Q1 Q2
P
Q

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The pricing decisions of the business and firms is crucially influenced by the concept
of elasticity of demand. Elasticity concept is one of the important metrics for the managers
determining the product’s price. The objective of marketing manager is to shift the products
from being relatively elastic to relatively inelastic. In addition to setting the price of the
products by the firms, elasticity also plays an important role in deciding about the price that
should be paid to the factor of production (Falkner, 2016). The formulation of policies by the
government is also dependent upon the concept of price elasticity of demand. The goods with
inelastic demand would have higher amount of tax imposed on it compared to the relatively
elastic products. One of the influential role is played by price elasticity of demand in
determining the price for monopoly. This is so because monopolist tends to charge higher
price for their products as there do not exist competition in the market (Dittrich et al., 2016).
It is therefore utmost important for the monopolist to evaluate the elasticity of the products
when determining its price.
The actual estimates of the elasticity of the demand for products is identified by
reviewing some economic journals explaining the concept of elasticity. In one of the articles
titled” Long run demand for energy services: Income and price elasticity over hundred
Q
P
P1
D
Po
Q1 Qo

ECONOMICS OF MANAGERS
years”, an investigation into the change in the demand for energy services. An evidences on
price and income elasticity of change in demand for energy over the last two hundred year
has been presented. Price elasticity of energy services can be broken down into the
substitution and income effect. The estimated value of price elasticity of demand for the
energy services has been assumed to be one. There would be a reduction in the price of
energy due to improvement in the energy efficiency by 1% (Fouquet, 2014). The price
elasticity of demand for the energy services is zero due to fall in the consumption of energy
and decline in the price of energy service.
Another journal article Titled” High frequency evidence on the demand for gasoline”
studies about the price elasticity of gasoline over the years. The responsiveness of demand of
gasoline is critical, to understand for evaluating the policies and determining the tax rates. In
this study, a model of frequency of purchase is adopted to help in explicitly explaining the
relation between the expenditure and demand for gasoline. It was found that the magnitude of
price elasticity of demand for gasoline is larger than the estimates. Using the model, it was
found that the estimates of elasticity of gasoline demand has a range from -0.27 to -0.35
(Levin et al., 2017). The demand estimates compared to the recent studies is more elastic in
the current paper. It has been found from the analysis that the demand for gasoline might be
considerably more responsive to change in price and in recent years, demand for gasoline has
become more inelastic. There would be substantially less increase in the gasoline price if the
demand were more elastic that what was thought (Basu & Bundick, 2017).
For the producers, price elasticity of demand plays an important role in setting the
price of their products and determining the optimum level of output. It is required by the
firms to have knowledge about whether the demand for their products is relatively elastic or
relatively inelastic. Such knowledge is used to the advantage of the firms or producers in
setting their price strategy. Furthermore, in event of deciding about the prices incurred for

ECONOMICS OF MANAGERS
acquiring factors of production is also influenced by elasticity of demand. Therefore, when
setting the price of products, accounting for the price sensitivity is the important part of
strategy. Considering the price sensitivity is particularly important for the producers when
they are deciding to change then price or introducing some new products and services in the
market. For the products with relatively inelastic demand, producers can maximize their
product by charging higher price and they should adjust the price of the products with
relatively elastic demand accordingly (Fuentes et al., 2016). Price elasticity is heavily
accounted by the monopolist who practices price discrimination. From the discussion, it can
be inferred that for the maximization of the profits and thereby revenue generated by the
producers is dependent upon the elasticity of demand.
Answer to question b)
Oligopoly market structure is characterized by the existence of few sellers and large
number of consumers selling either differentiated or homogenous products. There can be
different types of oligopolists dominating the market such as differentiated, collusive, perfect
or pure and non-collusive oligopoly. The characteristics of oligopoly market is discussed in
the below mentioned points.
 Entry or expansion barriers- New firms cannot enter the industry when the existing
firms are earning super normal profit in the long run and in the same manner, in the
event of firms incurring losses, they cannot exit the industry. The barrier to entry or
expansion are closely related. However, there can be some exception to this
characteristics. With the decline in the barriers, incentives of the firms to cheat
increases. There is considerable barriers to exit and entry in petroleum industry due to
high sunk costs (Toutkoushian & Paulsen, 2016).

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 Interdependence- Interdependency makes one firm operating in the market being
impacted by the action of other firms. The hallmark of the oligopoly market is
recognized interdependence and the interdependence results in translating into the
supra competitive pricing. The interdependency and interaction between the various
firms in the oligopolistic market make it a fascinating market structure (Zheng et al.,
2017).
 Intermediate demand curve- The inclination of the firms toward regularly changing
the product and output due to the actions of other firms causes the demand curve to be
kinked. This implies that at the price prevailing in the market, oligopolistic faces a
kinked demand curve and the firm would be facing two demand curves (Xu et al.,
2017).
 Non price competition- Firms in the oligopoly market compete with each other by
increasing the volume of the products and they do not compete on price wars. The
non-price competition takes the form of advertising and variations in terms of service,
design, quality and style of the products. Firms intends to maximize their revenue
subjected to the constraints of minimum profit. It is argued that sales would be
impacted by the measures of adopting non-competition, but the positive impact on
profitability is doubtful (McAlister et al., 2016).

ECONOMICS OF MANAGERS
Profit is maximized at output level OQ1 and the firm would attain equilibrium at Q3
level of output, if it intends to maximize profits.
The car manufacturing industry is dominated by few large firms that differentiates
their products using advertising who interact frequently with the mutual independent
behavior. The oligopoly in the car manufacturing market is evident as the market is
dominated by some of the few players such as Toyota, Holden, Mazda, Hyundai, Ford,
Mitsubishi, Volkswagen, Ford, Honda, Subara and Nissan. The extremely competitive
structure of the firms in the oligopoly market makes it distinctive. Small players in the car
market is extraordinarily influenced by some the small number of big companies. The
production in the global car market is dominated by ten leading firms from few countries
such as Italy, Japan, China, Germany and USA. Firm’s concentration the car manufacturing
industry is measured by the indexes and concentration ratios and that helps in gauging the
competitive environment in the industry (Pearson 2016).
Car market is characterized by the global integration of greater degree due to the
leveraging designs efforts by the global firms across the products that are sold in the multiple

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markets. Moreover, car industry has multiple production regions due to the buyer supplier
relationship and design activities along with manufacturing of vehicles in the multiple regions
and tailoring to the local markets (Head & Spencer, 2017).
Players in the car market are continuously changing their business model with the
objective of competing with other players in the market. The domestic players in the car
market are required to compete with the foreign competitors with increase in globalization. It
has been found by the domestic competitors of the car manufacturer hard to compete due to
gaining accessibility of the various foreign competitors into the home market and this make
them obtain lower production cost and raw material. If the home manufactures play on the
existing business model, they would incur higher costs and run behind their competitors. In
addition to this, it is also a known fact that the oligopolies compete on other facts rather than
price. Therefore, to compete with the competitors, car manufacturers have to keep on
introducing new models. Change in the business models helps the manufacturers in adding
variations to their products introduced by the efficiency in the manufacturing process by way
of reducing cost and promoting the products (Hansen & Hoenen, 2016).
Furthermore, the adoption of non-price competition measures such as brand
differentiation and advertising impacts the manufacturer of cars. Some manufacturers of cars
might differentiate the products such as line of its car manufactured using differentiation
strategy that assist in pointing out significant differences between the products of one firm
and its competitors. The uniqueness offered by the differentiation strategy helps in building
the customer loyalty. One of the most popular players in the auto market is BMW that
compete with its competitors using the differentiation strategy and manufacturing detailed
and innovative products. Auto products creation that is emotionally relatable to the emotions
of customers is one of the strategy used by BMW for differentiation (Aghion et al., 2016).

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Such differentiation focusing on the value highlights the durability and cost savings of the
products.
The power of advertising has been leveraged by the automakers since the early 1990s
with the objective of generating business and thereafter leading the revolution in advertising.
The focus of automakers from the perspective of advertising is to capture the attention of
customers and drive the brand awareness. For the automotive companies, advertising is
considered as the key and when it comes to advertising, car manufacturers are regarded as the
biggest spenders. The opinion of the consumer towards different types of car is impacted by
advertising and an enormous amount on advertising. Innovation has taken a center place in
the automotive industry because of consistent challenges being faced by the automakers to
manufacture efficient, smarter and faster cars. It is important for consumers to make them
aware of such features which is mostly done by way of advertising and indirectly increasing
their sales (Bauner et al., 2016).
During the first half of 2014, an amount of $ 928 million was paid out by general
motors with their global advertising expender recorded at $ 5.5 million. In United States,
Toyota is marked as one of the top ten spenders when it comes to advertising. The advertising
strategy used by Toyota is sponsoring events and made use of media such as TV
commercials, newspaper ads, internet, large ad billboards and posters. Nissan on other hand
emphasize on the comparative advertising and their commercials are mostly aimed at making
the products stand out from their competitors’ products (Malik et al., 2018).
Answer to question c)
The change in the climatic condition is impacted by steadily rising of the average
temperature since 1960s. This rise in temperature is incorporated in the greenhouse effect that
cause the temperature of the surface of earth to rise. Greenhouse concentration has been