2. District D usually has a demand of 3,000 Schmeckt Gut 2.0 and 18,000 Schmeckt Gut Energy Bars. Suddenly we receive notice that the demand has increased to 4,000 Schmeckt Gut 2.0 and 20,000 Schmeckt Gut Energy Bars.
a. Discuss and explain at least three possibilities how we could meet that demand.
Hint: Make appropriate assumptions.
b. For each solution that you have identified and discussed above, explain whether or not your solution is sustainable.
PPF of production capacity of Schmeckt Gut:
Supply equation of energy bars:
At equilibrium, we have
Now, substituting value of demand in above equation
Therefore, equilibrium market quantity is 200 units and equilibrium price is 400
According to law of demand, an increase in the price of commodity has an inverse impact on quantity demand of commodities other factors affecting the demand should remain constant. If there is subsequent increase in price by 1$, then at new price would be $ 401. Now, substituting this price in demand equation.
Now, putting value of new price in supply equation.
Therefore, as per demand and supply concept, quantity demanded has decreased and quantity supply has decreased.
Total revenue at $ 2.50= price * quantity = 2.50*15 = 3.75
Total revenue generated at both the price is maximum and same.
P1 = $ 2
Qo = 30000
Q1 = 20000
Price elasticity of demand = [Q1 - Qo / Qo ]/ [P1 - Po ]/ Po = 0.33/ 1= -0.33
Po = $ 1
P2 = $ 1.5
Qo = 30000
Q2 = 25000
Price elasticity of demand = [Q2 - Qo / Qo ]/ [P2 - Po ]/ Po = 0.1667/ 0.5= -3.34
The value of price elasticity of demand indicates that demand is highly sensitive to changes in price.
Q2x = 20000
Q1x = 10000
P1x = 3
P2x = 2
Q2y = 9000
Q1y = 11000
Percentage change in price of energy bars = - 0.333
Percentage change in quantity of high energy bars= .181
Cross price elasticity of demand for Fly High’s energy bars sold with respect to the price of our Schmeckt Gut Energy Bar = - 0.333/ .181 = 1.84
The different types of market structure comprise of monopoly, monopolistic competition, oligopoly and perfect competition.
Under perfect competition, there are large number of sellers and buyers and influence of either parties is negligible. The equilibrium market price and quantity demanded depended upon the market interactions (Ivanov and Sotnikova 2013). In order to have smooth introduction of Schmeckt Besser energy bar under this particular market structure, the price of product should be in par with prevailing market price.
Under oligopoly market, there are few sellers selling differentiated products. Therefore, for the introduction of new products requires a lot of advertisement and spends considerable amount of money on advertising activities (Hodgson 2014). Policy regarding price is another strategic variables to be taken into consideration.
One single seller characterizes monopoly market with large number of consumers. For smooth introduction of product under this market structure, organization would employ certain marketing campaign for making the products popular and available for use to customers.
Monopolistic competition uses the cost of production for taking decisions about price and output produced. Each firms under this market structure sells products that is slightly different from each other. Smooth introduction of the product can be done by following different distribution channel from its competitors and by employing different promotional techniques and having distinctive packaging (Hirschey 2016).
Schmeckt Gut has the market structure of monopolistic competition. The Research Department of Schmeckt Gut needs to undertake specific tasks in reference to analysis of market for introducing the product. Schmeckt Gut can consider the pricing decisions of the product based on the concept of cost. Various costs such as fixed costs, variable costs and imputed costs. Cost function helps in determining the price of product. The firm would be acting independently and it would have given cost curves on which profit of the newly introduced products are maximized. Maximization of profit and minimization of loss by the firm is done at the point at which the marginal revenue is equal to marginal costs (Ehrenberg and Smith 2016). In the end, demand of the product becomes equivalent to long run average cost. They want to attain situation of no economic profit where price is equivalent to average cost.
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