ECON6000: Economic Analysis of Schmeckt Besser Energy Bar Launch

This assignment, for ECON6000, examines the economic principles crucial for the successful launch of the Schmeckt Besser energy bar. It delves into the concept of elasticity, including price, income, and cross-elasticity, to understand demand changes and optimize pricing strategies. The analysis includes calculating price elasticity, determining the revenue-maximizing price, and assessing the relationship between the energy bar and its substitutes. Furthermore, the assignment explores the market structure, identifying it as an oligopoly, and discusses strategic decisions such as product differentiation, advertising, and supply chain management. The report emphasizes the importance of understanding competitor behavior and market share to ensure the product's success. References from key economics textbooks are included to support the analysis.

Economic Principles & Decision Making
ECON6000
STUDENT ID:
[Pick the date]

Problem A:
1) The information provided indicates that Schmeckt Gut has plans to introduce Schmeckt
Besser energy bar in the market. In order to ensure a successful launch of the product, the
elasticity concept is quite vital. Elasticity essentially highlights the demand change in the
underlying product or service when a unit change tends to occur in the underlying factor.
There are a host of factors ranging from consumer income, product price or pricing of
other goods that can impact the underlying product demand and hence need to be
considered (Mankiw, 2014). One of the most common elasticities is the price elasticity
which highlights the impact of price change on demand. Typically for normal goods price
and demand are inversely related. However, the magnitude of price elasticity determines
whether the demand is elastic or inelastic which plays a pivotal role in product pricing.
Besides, the income elasticity highlights the impact of changing consumer income level on
product demand. This would enable the company to identify the key target segment from
income perspective. Thus, elasticity is quite pivotal for taking key economic decisions
related to the new product launch (Mankiw, Mankiw & Taylor, 2015).
2) The research department should compute the price elasticity of demand which will help
understand if the demand is elastic and inelastic. The pricing decision for the product
launch would be dependent on the same and for elastic demand, lower pricing can be quite
effective. However, in case of demand being inelastic, the focus would be on product and
brand based differentiation as lower price point would not help. The expected cross
elasticity of the new product with regards to the established competitors also needs to be
outlined since it would enable the company to predict the likely response from the
established players and the impact on sales. Also, income elasticity also ought to be
considered as it would help in determining the target customers (Krugman & Wells, 2014).
Problem B:
1) The price which would maximise the revenue can be found by using the given data of
price and quantity demanded and estimating the revenue for each price. This is carried out
and summarised below.

The maximum revenue of $ 40,000 is obtained when the price of the energy bar is $ 2 per
unit. The price elasticity needs to be estimated for this price which is computed as follows
(Nicholson & Snyder, 2015).
.
Thus, at the revenue maximising price, the product has unit elasticity.
2) The relevant price elasticity computation is illustrated as follows.

3) a) The Schmeckt Gut Energy Bar price has been lowered from $ 3 to $ 2 on a per bar
basis. Hence price change (%) = = [(2-3)/3]*100 = -33.33%
On the basis of the data provided, it is apparent that the above price change has led to sales
of Fly High bars dropping from 11,000 to 9,000. Hence, sales change (%) = [(9000-
11000)/11000]*100 = - 18.18%
4) The critical factor to observe is the sign of the cross elasticity to demand. This is positive
which implies that the two products under consideration i.e. Fly High and Schmeckt Gut
are substitutes. This can also be understood from the fact that the price of Schmeckt Gut
Energy Bar has decreased which would increase the demand of Schmeckt Gut Energy Bar
and all complementary products. However, demand of Fly high bar has decreased which
establishes the fact that it is a substitute (Krugman & Wells, 2014).
Problem C:
1) A key element to consider with regards to Schmeckt Besser energy bar is the underlying
market structure. It is apparent that there are other sellers in the market selling energy bars
and hence the given market cannot be termed as monopoly. Also, the energy bars which
are sold by different players is not identical and hence the market is not perfectly
competitive (Mankiw, 2014). Further, the industry is dominated by selected players only
and hence oligopoly seems a suitable choice. In this market there is both price and

product based differentiation and market share is paramount. Also, advertising is used in
order to build a brand which also tends to act as an entry barrier. Further, the supply chain
and distribution ought to be in place (Nicholson & Snyder, 2015).. Considering this
industry structure, the board must take measures to advertise and differentiate the products
by identifying the USP (Unique Selling Proposition). Also, suitable linkages (forward and
backward) need to be developed for a seamless supply chain. Besides, the product market
share should be considered as a key performance metric (Krugman & Wells, 2014).
2) It is imperative to understand that economic decisions in case of oligopoly industry
structure tend to be dependent on the decision made by competitors. Therefore the
research department tends to present a detailed industry report which details the key
differentiation offered by the players along with their respective market share and
promotional strategy. Besides, for any strategy launching the product in the market, it is
imperative that the likely responses of the established players in the market should be pre-
empted which is critical to the success of the product especially during the initial phase
(Mankiw, Mankiw & Taylor, 2015).

References
Krugman, P. & Wells, R. (2014) Microeconomics. 3rd ed. London: Worth Publishers.
Mankiw, G. (2014) Principles of Microeconomics. 6th ed. London: Cengage Learning.
Mankiw, G.N., Mankiw, G.N. & Taylor, P. (2015) Microeconomics 5th ed. Sydney:Cengage
Learning.
Nicholson, W. & Snyder, C. (2015) Fundamentals of Microeconomics.11th ed. New York:
Cengage Learning.