First, it is crucial that we calculate the Q. value in order to find the elasticities of the other independent variables. This can be done by plugging in the assigned values for each of the independent variables provided by the problem case study. According to the research, “price elasticity of demand is the percentage change in quantity demanded as a result of a 1% change in price” (Fibich, 2005). Thus, it can be determined with the following equations:
Q= -5,200-42P 20Px 5.2Y 0.20A 0.25M
Q= -5,200-42(500) 20(600) 5.2(5,500) 0.20(10,000) 0.25(5,000)
Price of Product (P)
ED=?P / ?Q x P/Q
=-42 x 500/17,650
Price of Competitor’s Product (Px)
ED=?Px / ?Q x Px/Q
=20 x 600/17,650
Per Capita Income (Y)
ED=?Q / ?Y x Y/Q
=5.2 x 5,500 / 17,650
Monthly Advertising Expenditure (A)
ED=?A / ?Q x Q/A
=0.2 x 10,000/17,650
Number of Microwaves Sold in the Market (M)
ED=?Q / ?M x M/Q
=0.25 x 5,000/17,650
Clearly, there are implications for both long and short-term pricing strategies. Essentially, cutting the price would immediately increase the demand. However, it would begin to eat away at the organization’s supply if done too aggressively. This would ultimately force the company to increase production, which would require investments in production capacity. For more long-term profit potential, price should be set so that the demand can be met long-term as well. Ultimately, the best pricing strategy aims to grow profit potential, but also the consumer base as well (Saunders, 2013). If short-term price cuts forces the inventory out of stock, it may impact the ability to retain and grow consumer base.
The firm should only cut its prices if it would increase overall demand. Thus, one needs to look at the price elasticity in order to make such a decision. Based on the previous computations, the price elasticity is -1.1898. However, the absolute value of this makes it a positive 1.1898. This value is greater than 1, which means that a decrease in price would positively increase the overall demand. Ultimately, this means that the firm should consider cutting its prices because it would increase the overall demand and thus increase its market share.
The equilibrium price would be $375, and the quantity would be 20,000. This would represent the break even point.
Still, there are significant factors that could cause changes in supply and demand for the product. In fact, the market size could change which would impact the supply and demand curves (Vogt, 2014). Additionally, the price of competitor’s products could also change. This would also change the nature of the supply and demand curve (Vogt, 2014). If competitors reduced their prices, the demand curve would shift left. Finally, consumer tastes and desires could change. This is a less quantifiable factor and thus is harder to account for using statistical analysis of economic factors.
Fibich, GGadi. (2005). The dynamics of price elasticity of demand in the presence of reference price effects. Web. http://www.math.tau.ac.il/~fibich/Manuscripts/elasticity_JAMS.pdf
Saunders, Jim. (2013). Pricing for long-term profit and growth. Pricing Solutions. Web. http://www.pricingsolutions.com/index.php/en/publications/published-pricing-articles/19-publications/published-art/31-pricing-for-long-term-profit-and-growth
Vogt, Crystal. (2014). What factors force a shift in the demand curve? Small Business Chronicle. Web. http://smallbusiness.chron.com/factors-force-shift-demand-curve-25441.html
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