Price Elasticity of Demand - Term Paper Example

Q1. define price elasti of demand. Price elasti of demand refers to the change in demand that is d as changes in price for a given commodity occur. For instance, if a given commodity is inelastic, then changes in the price will not affect the overall number of units sold. However, if a given commodity is elastic, then the demand will fluctuate relative to the price that it is being offered at. The equation for price elasticity of demand is as follows: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price (Gordeon et al., 2013). Q2) Explain how using advertising a business owner could make demand more inelastic. A business owner can use these concepts to their advantage. For instance, by leverage an aggressive advertising strategy, the business owner could create an inelastic demand for a given good or service; even if such a demand did not exist previously. This “unnatural” inelastic demand is created as a means of encouraging and influencing the consumer to integrate with the given good or service. This approach is used rather often as a means of encouraging a higher than average integration with a given good or service; hence the way that certain types of goods or services are so heavily marketed and ultimately create an unnatural level of demand as compared to what might otherwise exist should an aggressive level of marketing not be utilized (Van Heerde et al., 2013). Q3. Explain what is meant by marginal cost. draw the marginal cost and average cost curves of a business identifying where the decreasing marginal returns appear. Marginal cost refers to the change in overall cost that occurs when the quantity produced increases by an increment of a certain unit. This is useful in terms of understanding at what point a given manufacturer or producer should cease production and/or at what point it will be economically beneficial to upgrade the production capacity to deal with increasing demand or expected increased demand in the future (Rogerson, 2011). As such, marginal cost is not only associated with raw material inputs and/or labor, it can include the cost of building or purchasing new production space and machinery; up to and including a new factory or factories. The decreasing marginal returns can be noted in the graph below as the areas in both blue and red that appear as high values on the x and y axis. Q4) define the term oligopoly and provide an example of a cartel: An oligopoly can be defined as a type of market form that is dominated by only handful of sellers. These oligopolies then have a high likelihood of colluding as a means of setting prices and reducing the entrants to the market that might threaten to drive down price. Oligopolies exist throughout the world and can be noted in the banking sector, automobile production sector, and telecommunications markets (Goettler & Gordon, 2014). Broadly speaking, governments around the globe have made gestures towards regulating and enforcing standards upon oligopolies; however, the effectiveness of these approaches are argued by many to be relatively useless. Further, a prime example of a cartel would be that of OPEC. As a function of the fact that OPEC nations actively collude as a means of driving up the cost of the resource they produce and restricting or expanding the quantity, this example is one that quintessentially defines the cartel behavior that is exhibited in other lesser known sectors throughout the global economy. Q5 identify two microeconomic policy objectives. Explain why business owner would be interested in knowing the unemployment level in an economy.  A prime concern of microeconomic policy relates to what is oftentimes referred to as equity/fairness. Within this metric, microeconomic policy is focused on seeking to increase the efficiency of the market and reduce the overall level of unemployment that exists within the system. Naturally, these are ancillary goals; however, they are nonetheless related to the first goal that has been listed. Furthermore, be impacting on all of these goals at the same time, microeconomic policy is able to effect a more even distribution of wealth throughout the system; thereby benefitting the maximum number of individuals (Kakulia & Gigineishvili, 2005). Although this represents two approaches through which micro-economic policy is effected, it must be understood that there are of course a litany of other approaches. Moreover, the level crossover that exists between them is something that creates an infinitely complex web of policy engagements through which a government can attempt to impact upon micro-economics. Q6. describe what is known as monetary policy. Explain how Bank of England may use it as a tool to improve the economy. Broadly speaking monetary policy refers to the mechanisms through which a govern authority seeks to control the supply of money within a system. Whereas there are many means through which monetary policy can be effected, one of the most common means is to constrict or relax the interest rates (or percentages at which money can be borrowed). By engaging with this rate, governments can constrict the overall availability of capital or expand the overall availability of capital; cooling or heating an economy as promoting the overall economic stability and growth requires (Wright, 2012). This is used as a tool by the bank of England to improve the economy as it allows for the Bank of England to expand access to capital during periods in which slow economic growth threatens to stall the economy; or to utilize the opposite during periods in which faster than healthy, or faster than expected, periods of economic growth threaten to out-pace the market. Q7) Factors affecting demand for Thames Water PLC are concentric mostly upon season. As individuals will be expected to demand more water during the summer months, both for reasons of actual need and psychological reasons, the price elasticity of demand is at least partially inelastic. Much in the same way as fuel for vehicles is partially inelastic, individuals will require water for cleaning, cooking, bathing, and gardens throughout the year; irrespective of what the price may be. Whereas it is true that they may alter their habits as a function of seeking to react to the changes that increased prices might affect on them, the ultimate need for water will not change. A further reason for this has to do with the fact that there is not another firm or service that offers the same product to the consumer. Finally, it can and should be noted that due to the fact that there are no substitute goods for liquid water, the consumer is placed in a situation in which the demand for this vital necessity is ultimately inelastic; even though overall rates of water usage shift throughout the year. This encourages the reader to consider the inelasticity of the price and realize that government regulation and legislation is ultimately what keeps Thames Water from gauging the consumer based upon the inelastic demand that is required for this primary resource. As the cost of entry is extraordinarily high for would-be entrants into the water provision market, due to the high cost of infrastructure and maintenance of this infrastructure, it is required that a regulating body be in charge of determining what fair and reasonable prices can be set forward for Thames Water to charge of the consumer (Ellickson et al., 2012). As such, the true nature of supply and demand equalizing under the influence of the equilibrium point is altered. If it were indeed the case that Thames Water experienced a truly inelastic demand and it were also true that controls did not force it to abide by regulations or standards of price control, the price per liter of sewage treatment or the price per liter of water provision would be an order of magnitude higher. This is of course due to the fact that Thames Water would be free of any constraints with respect to the rates that it could charge the consumer. With demand static and prices free to fluctuate, the entity would force the consumer to be the price taker while it extends it influence further as the price maker. Q8) GDP growth is generally an accurate way to predict the economic development and behavior that will be exhibited within a particular nation during a set period of time. However, this measurement in and of itself is not perfect towards understanding both macro and micro-economic behavior. As such, even as the UK GDP will likely grow nearly 3% in 2014, issues pertaining to the economic downturn, which has dominated the budget and financial concerns for the better part of six years now, will only be ameliorated as continued and prolonged growth is exhibited within the system. One of the overarching reasons for this has to do with the fact that the budget of the government was experiencing severe cost overruns during the height of the economic crisis. Rather than merely shuttering services and/or otherwise experiencing complete levels of austerity, it was necessary for the government to continue to function. Because of this, large debts were incurred; debts that will take years to service and will drain resources from future budgets. As was noted within the question at hand, it will not be until 2018 that a budget surplus will be exhibited within the United Kingdom; if one considers the current track of the economy to be an estimate for how the future will unfold. This reality could very well change; however, with the need to continue to fulfill public requirements and the expanding population of the United Kingdom, as well as servicing the existing debt that has been created to buoy the economy through nearly a full decade of sustained austerity, it is not surprising that the differential between the GDP growth and the reflection of the budget remains as it does. Bibliography Ellickson, P, Misra, S, & Nair, H 2012, Repositioning Dynamics and Pricing Strategy, Journal Of Marketing Research (JMR), 49, 6, pp. 750-772, Business Source Complete, EBSCOhost, viewed 30 April 2014. Goettler, R, & Gordon, B 2014, Competition and product innovation in dynamic oligopoly, Quantitative Marketing & Economics, 12, 1, pp. 1-42, Business Source Complete, EBSCOhost, viewed 30 April 2014. Gordon, B, Goldfarb, A, & Yang, L 2013, Does Price Elasticity Vary with Economic Growth? A Cross-Category Analysis,Journal Of Marketing Research (JMR), 50, 1, pp. 4-23, Business Source Complete, EBSCOhost, viewed 30 April 2014. Kakulia, M, & Gigineishvili, N 2005, The Primary Objectives and Priorities of Microeconomic Policy’, Problems Of Economic Transition, 48, 4, pp. 30-42, Business Source Complete, EBSCOhost, viewed 30 April 2014. Rogerson, WP 2011, On the Relationship Between Historic Cost, Forward Looking Cost and Long Run Marginal Cost, Review Of Network Economics, 10, 2, pp. 1-29, Business Source Complete, EBSCOhost, viewed 30 April 2014. Van Heerde, H, Gijsenberg, M, Dekimpe, M, & Steenkamp, J 2013, Price and Advertising Effectiveness over the Business Cycle, Journal Of Marketing Research (JMR), 50, 2, pp. 177-193, Business Source Complete, EBSCOhost, viewed 30 April 2014. Wright, JH 2012, ‘How Monetary Policy Effects the World, Economic Journal, 122, 564, pp. F447-F466, Business Source Complete, EBSCOhost, viewed 30 April 2014. Read More