Final Exam Notes: Economic Decision Making (Supply and Demand)

Topics: Supply and demand, Economics, Elasticity Pages: 6 (2124 words) Published: August 14, 2013
1. If a firm is able to properly calculate the price of a elasticity of demand for its products, it will be able to determine the market’s responsiveness, or sensitivity, to changes in price for a specific product and will allow the firm to more accurately forecast the effects on total revenue. Knowledge of elasticity can help a firm to project big-picture effects of raising or lowering products’ prices by predicting changes in market price on total industry sales and total consumer expenditures in the industry.

For example, if a sunglasses retailer is looking to increase their total revenues, they need to determine how a change in the price of sunglasses will input the quantity of sunglasses demanded. If they increase the prices of sunglasses by 15% and demand is inelastic, then revenues would increase. The likelihood, however, off sunglasses being or becoming elastic is slim. For a sunglasses retailer to increase their total revenues, it would seem more plausible for the retailer to focus their business strategy on decreasing the prices of sunglasses in order to sell more units and increase consumer demand.

2. As a manager of a steel mill, it is critical to consider certain economic indicators when thinking about demand for steel products. Though steel is one of the world’s most widely traded commodities, the demand for steel products tends to be rather cyclical in nature. Demand for steel products often fluctuates based on demand of products and services offered by complementary industries such as manufacturing, automobile, development and construction, real estate, infrastructure companies. Further, if a steel mill company has an international customer base, the mill would need to consider these economic factors in foreign markets as well as domestic markets and assess the overall end-product demand from these industries. For instance, if the mill maintains an international customer base, the mill should assess the current economic status and examine gross domestic product of each country to forecast demand. If the mill transacts with China, the largest producer and consumer of steel, it would behoove the mill to look at growth trends in the complementary industries in the Chinese market. As well, the mill would need to identify factors affecting the price of steel in certain markets, which could include tariffs.

Another factor for a mill to consider is the range of possible substitutes. The first range of substitutes consists of the other companies that produce steel. The steel industry is a niche-like industry where there are only a handful of competitors. The second range of substitutes considers other products on the market that could be used in place of steel. To varying degrees, aluminum, glass, cement, composites, plastic, and wood can acts as substitutes. If steel is viewed by the market as elastic, allowing substitutes to exist, a lower price point of substitutes will result in decreased demand for steel and an increased demand of the substitutes.

The mill will also need to consider current steel supply. Historically, the steel industry is categorized, in part, by overcapacity. If there is an excess supply of steel then prices will most likely drop, affecting total revenue. When this occurs, the company may want to halt production to decrease supply. Also with respect to supply, the mill should consider the six major variables of supply and calculate a projection of the general supply function. For example, if the price of a input raw material, such as iron ore, significantly increases, the cost of production will also increase. Conversely, if new technologies are implemented, it could increase the efficiency of production, thus lowering production costs.

3. Quantity supplied refers to the amount of a good or service offered for sale during a given time period. There are six key variables that can impact the quantity supplied: 1. Price of the good/service; 2. Price...
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