Managerial Economics: Long Term Investment Decision - Coursework Example

Managerial Economics: Long Term Investment Decision of the Contents Introduction 3 Discussion 3 Differences in Demand Elasticity and Pricing Strategies of Managers 4 Price Elasticity of Demand 4 Income Elasticity of Demand 7 Cross Elasticity of Demand 7 Advertisement Elasticity of Demand 9 Economic Impact of Contracting and Governance form within the Organizations 9 Importance of Technology and Information Managerial Economics and Globalization 10 Conclusion & Recommendations 11 References 12 Introduction Managerial Economics is a practical approach of economic theories, which indicates application of such theories and methodologies into managerial decision making within organizational frameworks. Such applications of economics help the managers to decide on the allocation and utilization of the scarce resources of their respective firm, firms’ risk taking capability, degree of competitiveness aligning with the business strategies and expansion of business in domestic as well as international markets (Froeb, McCann, Ward & Shor, 2015). With a rapid expansion of globalization and international trade integrations, the shape of market operations, level of production and nature of production process, sourcing of inputs as well as pricing decisions of the firms operating in global trade environment are changing drastically. All such contributory factors complexes and largely influences long term investment decisions. In this paper, the long term investment decision of a hypothetical firm producing frozen microwave goods will be analyzed by studying different pricing decision of manager in different demand elasticity situations, evaluating economic impact of contracting, governance and organizational from within organizations and examining degree of influence of technology and information resources in the global business of the concerned firm. Discussion According to the case study, a global manufacturing company of low-calorie frozen, microwave Food Company has decided to expand globally and accordingly requires to take long term decisions related to capital budgeting. However, the managers are facing considerable problems as the costs of major ingredients are rising sharply. In the next segment, pricing decisions of the managers of the firm as a result of varying elasticity of demand will be analyzed. Differences in Demand Elasticity and Pricing Strategies of Managers Demand elasticity indicates the responsiveness of the quantity demanded as a result of changes in factors like price, income, promotional activities etc. In other words, demand elasticity calculates the quantity demanded by the consumers due one unit change in factors such as price and income. Price Elasticity of Demand It is defined as change in percent of the quantity demanded, due to one percent change in the price level, keeping other things constant. In other words, price elasticity of demand (eP) shows the receptiveness of demand quantity of a particular good with respect to changes in price level, assuming that other variables such as consumers’ taste and preferences, income level of target consumer group, prices of other products remains constant. The relationship between price and demand being linear and inverse, the quantity demanded varies along the demand curve due to change in price level (Hall & Lieberman, 2012). Price elasticity of demand (eP) = (% change in quantity demanded / % change in price) When consumers demand does not change with the changes in price level, it is known as perfectly inelastic demand (eD= 0). In case of perfectly inelastic demand, the products being necessary for the consumers, changes in the price level have negligible impacts on the demand from consumers. It may also happen that limited substitute is available for the consumers and the producer enjoys monopoly power in the market segment. As a result, producers may increase their price level to a certain degree by utilizing their market power, knowing that demand of his product is not contingent to price changes. When the degree of changes in demand quantity is relatively smaller than the changes in price level is known as relatively inelastic demand (-1 < Ed < 0). The situation arises when the buyer is facilitated with a very small number of substitute products (Maddala, 2004). Figure 1: Price Elasticity of Demand (Waschik, Fisher & Prentice, 2010) Hence, as price increases, the consumers can shift to a very few number of substitutes available to them. As a result, percentage change in the demand quantity becomes lesser as compared to the percentage change in the price level. Unitary price elasticity of demand (Ed = 1) arises when change in percentage of the price level becomes identical to the changes in demand quantity. This kind of demand elasticity indicates a proportionate reaction of consumers due to price change. When the percentage change in quantity demanded becomes higher than the percentage change in price level, it indicates relative elasticity of demand (-∞ < Ed < -1). The goods and services for which the changes in price level adversely affect the consumer demand are normal in nature and have several substitutes available in the market. Therefore, the producer needs to take cautious steps before increasing prices of the products because increment in price level may result the producers to experience shift of a large chunk of consumers towards a number of substitute goods available to them. Finally, price elasticity of demand is said to be perfectly elastic only if even in a small changes in the price level leads to influence the demand quantity infinitely  (Ed is − ∞). In other words, infinitely small change in the price level cause for infinitely large change in the demand quantity of the concerned product. In a competitive market segment, where consumers can avail numerous substitute products, demand tends to be infinitely elastic as a response towards minimum price change (Paul, 2011). Considering the case of low-calorie frozen, microwave Food Company, with the expansion of globalization and privatization, more and more family in the world’s socio economic circumstances, are experiencing participation of both male and female entities of the families into the workforce. As a result, the pace of life has drastically changed and the consumers have more inclined towards a fast track lifestyle and upgraded standard of living. Such economic scenario has enhanced the demand for all such low calorie frozen products. Increasing demand of such products has also influenced more producers to engage into the business. Therefore, industry of the food company is characterized by presence of a number of competitors in the market. Hence, the demand of the products of the concerned food company is relatively elastic to price changes. However, if the price of the input increases, all the producers will experience an increment in the cost of production, ceteris paribus. As a result, all the producers will be compelled to increase the price level of the products. In such scenario, if the company can maintain the quality of the product and other factors influencing the consumers’ demand, there will be a moderate change in the demand from consumers due to increase in price level (Waschik, Fisher & Prentice, 2010). Income Elasticity of Demand Figure 2: Income Elasticity of Demand (Waschik, Fisher & Prentice, 2010) Income elasticity indicates how changes in income level of the consumers affect the demand from the consumers, other things remaining constant. As the income increases the demand curve shifts upward, showing an increment in customer demand and vice versa. Increase in the income level of consumers tends to improve their standard of living and accelerates the speed of lifestyle. Therefore, an increase in income level will definitely enhance the demand for low calorie and frozen products of the firm (Maheshwari, 2012). Cross Elasticity of Demand Figure 1: Cross Elasticity of Demand (Waschik, Fisher & Prentice, 2010) It shows percentage change in demand for goods as a result of one percent change in the price level of other substitute products. In real world also, it has been noticed that as a result of an increase in the price of other similar goods, demand for the product highly increases. Therefore, if the food company in discussion can keep the quality of the products optimum and maintain the promotional strategies, an increase in price level of other companies in frozen microwave foods segment, can definitely increase the demand for their products. Hence, the company can take strategy of not increasing the price of their products due to increment in input prices. As the other producers will automatically increase their product prices in order to meet their production cost, increasing demand and subsequently sales of the company’s will lead to enhance their profitability as well. Therefore, an additional increase in the cost of input will be met through an additional increment in sales, even if the price level is kept constant (Schotter, 2008). Advertisement Elasticity of Demand It tends to calculate the company’s demand as a result of promotional activities, such as advertisements run by the company. Although, traditionally it is considered that the effect of advertisement positively influences the demand of the products and services, but in today’s competitive world, consumer may response to the advertisement of the competitors’ product more favorably. Hence, the goodwill and investment of the firm on advertisement activities may result negatively for enhancing demand of products of the concerned firm. Therefore, the firm must choose its advertisement activities carefully so that it proves to be beneficial for enhancing the demand of the products for the firm. Economic Impact of Contracting and Governance form within the Organizations Contracting as well as external governance leaves a great impact on the organizational operations and financial management. Strict governance largely controls unethical practices that are likely to arise in various steps of business conduction starting from hiring policies, sourcing of raw materials, contracting to providing resolutions for conflict of interest with shareholders and procuring quality financial reports. The positive consequences of strict governance enhance reputation of the company in the industry segment and influences consumers to obtain product from that very company because of their goodwill in the market (Romero, 2011). Importance of Technology and Information Managerial Economics and Globalization Presence of complete information for buyers and sellers both and technological advancement holds utmost importance for the companies operating in today’s competitive global business environment. Firms should contain complete information regarding the specification and ever changing complex needs of their targeted consumer segment. Therefore, the company producing low calorie frozen goods must possess absolute information regarding their customer base, their loyalty towards the company’s product and exit rate per month i.e. the number of consumers shifting their buying behavior towards the products of other companies. The income level of the consumers and the present situation of the business and service sector should also be treated as significant information which the company can utilize in formulating future decisions (Gibbons & Roberts, 2013). Apart from that, the company should also hold complete information regarding their competitors, the product differentiation, pricing and promotional strategies taken by them. Considering the internal information, the company must analyze their past sales records and profitability in order to forecast their future sales and profitability, taking the rising cost considerations into account as well. Utilizing all such factors, the company will be able to conduct constructive research & development and take correct decision regarding pricing and operational strategies (Hirschey, 2008). Coming to the technological consideration, production of low calorie, frozen products for cooking in microwave involves high utilization of technologies in various steps of manufacturing such as blanching, sorting, inspecting, pasteurizing and packaging. The more the technological advancement introduced by the producer, the more efficient and healthy product will be produced. In fact, as the frozen products are vulnerable or delicate in nature, efficient distribution system should also be adopted to enjoy a competitive advantage. However, while introducing technological advancements, the company must not forgo cost considerations in order to achieve a positive profit out of their production and distribution process (Mowshowitz, 2002). Conclusion & Recommendations Examining the demand responsiveness, governance, information and technology used for researching whether it will be viable for the company to expand their business it can be inferred that in financial terms, the company must employ capital budgeting techniques in order to evaluate present value of the future returns derived from their long term business investments. Once the company understands the potential market and demand responsiveness of their products they must also concentrate on their past sales record and the present product-price-promotional strategies of the competitors in order to evaluate feasibility of their long run investment decision. If all such variables provide positive indications, then only the company should plan for the long term investment. References Froeb, L., McCann, B., Ward, M. & Shor, M. (2015). Managerial Economics. Boston: Cengage Learning. Gibbons, R. & Roberts, J. (2013). The Handbook of Organizational Economics. New Jersey: Princeton University Press. Hall, R. & Lieberman, M. (2012). Microeconomics: Principles and Applications. Boston: Cengage Learning. Hirschey, M. (2008). Managerial Economics. Boston: Cengage Learning. Maddala. (2004). Microeconomics: Theory and Applications. Nodia: Tata McGraw-Hill Education. Maheshwari, Y. (2012). Managerial Economics. New Delhi: PHI Learning Pvt. Ltd. Mowshowitz, M. (2002). Virtual Organization: Toward a Theory of Societal Transformation Stimulated by Information Technology. California: Greenwood Publishing Group. Paul, K. G. (2011). Managerial Economics: Economic Tools For Today S Decision Makers. New Delhi: Pearson Education India. Romero, P. J. (2011). The Economic Benefits of Preserving Independent Contracting. Retrieved from http://www.calchamber.com/governmentrelations/documents/economicbenefitsofpreservingindependentcontractingstudy.pdf Schotter, A. (2008). Microeconomics: A Modern Approach. Boston: Cengage Learning. Waschik, R., Fisher, T., & Prentice, D. (2010). Managerial Economics, Second Edition: A Strategic Approach. London: Routledge. Read More