Plasmas Plus for Harvey Norman - Case Study Example

Name: Instructor: Course: Date: Plasma’s plus for Harvey Norman Introduction Profit maximization forms part of the major objectives of starting a business. The profit margin emerges as the difference between the sales revenue and the cost of the sales. Therefore, for one to maximize profit, the sales revenue has to increase. One way of increasing sales revenue includes increase of sales units (Arthur pp.54). The number of sales units highly depends on the demand for the commodity. Businesspersons need to understand the various market forces in order to manipulate them in their favor. This helps them determine the type of commodities to stock, prices to charge their commodities and the seasonal variations of commodity demand. Demand is the willingness and ability of a potential buyer to acquire a commodity. The ability depends on the level of income that a consumer earns. If potential buyers of a commodity desire to possess it but cannot afford to, this does not qualify as demand. Suppliers of a commodity have to consider the income levels of their target market in order to maximize their sales returns. The Law of Demand Price is the main determinant of demand level for various commodities at ceteris paribus. The theory of demand expounds on the relationship between demand of commodities and their respective prices (Gans & Mankiw pp.376). It suggests that the lower the price of a commodity, the higher its demand and the higher the price, the lower the demand of the same commodity. The reverse also applies in that the lower the demand, the lower the prices and high demand leads to an increase in prices. The demand curve forms the basis of the demand curve that shows the diagrammatic level of demand at various price levels. The Demand Curve The demand curve refers to a graph that shows the relationship between price and quantity that a consumer is able and willing to buy at the price. All individual demands at various prices add up to form a demand schedule from which a demand curve emerges (Krugman pp.119). They help in prediction of purchase behaviour of consumers in competitive markets and in determination of equilibrium price and quantity of various commodities when combined with the supply curve. Price appears as the vertical (y) axis of the demand curve while quantity appears on the horizontal (x) axis. The curve slopes downwards from the left to the right thus has a negative slope. This means that consumers buy more of a commodity as its price falls and vice versa. The function takes the form of Q = a – b P where b represents the slope of the demand curve and shows the effects of price on demand. Constant‘a’ represents the effects of other determinants of price other than price. The demand curve applies the inverse demand function, which expresses price as a function of quantity to come up with P = a – b Q where b represents the slope of the curve, a represents the intercept at zero units of quantity while Q is quantity and P, price. Movement along the demand curve results from changes in price levels of a commodity. A rise in price moves the quantity demanded towards the left due to the decrease in demand while a fall in price moves the quantity towards the right. The inverse demand function equals the average revenue function i.e. P=AR. The inverse demand function derives the marginal curve which when equated to the marginal cost can tell the optimal units to sell in order to maximize the profit. Price Pe P1 Qe Q1 Quantity When price falls from Pe to P1, the demand falls from Qe to Q1. In this case, Pe represents $15000 while P1 represents $5000, which automatically translates into a rise in quantity demanded. A rise in demand leads to large sales volume and eventually a larger profit margin. The concept of opportunity cost explains the relationship between scarcity and choice. It refers to the cost of the foregone second best alternative. Scarcity of resources always faces us and most of the time people need to make choices between various options since they cannot afford to have them all. Consumers consider this when shopping and therefore the value of plasma TVs needs to outdo the other alternatives. This ensures they do not incur regrettable opportunity costs. Elasticity of Demand Price elasticity of demand refers to the sensitivity of quantity to changes in the level of price. It shows how much the quantity changes due to rise or fall of prices expressed in percentage terms. It helps calculate the changes in level of revenue. When the price elasticity of demand falls between 0-1, demand is deemed inelastic. On the other hand, a price elasticity of demand equal to 1 depicts unitary elastic demand. When greater than 1, the demand is elastic. This implies that when PED has a small coefficient, price changes have little effect on demand levels while a high coefficient implies that changes in price lead to great variations in quantity demanded. Most traders prefer stocking commodities with inelastic demand since less sales variation occurs in case of an increase in price. The formula appears as PED= %change in quantity/ %change in price or = (∆Q/∆P) × (P/Q) In Harvey’s business, the price elasticity of demand would be: = (Q1-Qe)/ (5000-15000)*(5000/Q1) or = (Q1-Qe)*100/ (5000-15000) This gives a negative PED, which falls below 1 meaning that the price variations lead to low fluctuations in quantity demanded for plasma TVs. Thus, plasma TVs offer security to the business in case prices rise since it will lose fewer sales units (Goodfellow p. 2). Shift in the Demand Curve A shift in demand occurs when other factors other than price cause variations in demand level. A shift of the demand curve towards the right means a rise in demand while a shift to the left means a fall in demand. These factors affect demand even when price remains constant for instance income levels, tastes and preferences. The high employment level in the country means that a large part of the economy’s population earns income. Having a disposable income means that the citizens can afford more of the items available in the market. Income highly influences the demand for various products. Demand rises as the level of income of the consumers rise. Demand for giffen goods rises as the income increases since the consumer prefers commodities that are more expensive. Demand for inferior goods however decreases since the consumer can afford higher cost substitutes. Normal goods however receive significant effect on their demand levels. However, the units of commodities consumed by a consumer have a certain limit. The law of diminishing marginal utility explains this concept (Case pp.12). The utility obtained from consumption of a certain commodity increases with increase in number of units consumed until a certain point of saturation. The level of utility obtained eventually diminished with more consumption of the good thus, no matter how low the prices of plasma TVs get, the customers cannot buy beyond a certain level of units. In Harvey’s business, the number of plasma TVs sales will increase if the level of income of the consumers increases and vice versa. Prices of related goods also influence the level of demand for a commodity. In case of substitutes, the rise in price of substitutes will lead to a rise in demand for plasma TVs. For complementary goods however, a rise in price of one causes a fall in demand for the other. Changes in tastes and preferences have largely influence the quantity demanded for the televisions (binger pp.98). People lately currently prefer to stay indoors meaning the demand for domestic entertainment automatically rises. Therefore, more units of plasma TVs sell at a faster rate. Technological affect the demand levels for various commodities. This is due to the efficiency realized from the use of improved technology. Low interest rates for the producers translate into incurring less cost of finance (Gottliebsen p.1). Financing forms, a major part of capital for production purposes therefore low market interest rates make it easier for producers to acquire capital and to produce at minimum cost. The cost of production reduces as a result translating into a larger profit margin from the sale of the commodity. Hence encouraging suppliers to supply more units of the commodity and encourage entry of new suppliers into the market. A shift in the supply curve occurs towards the right, which as a result lowers the price of the commodity. Conclusion The concept of demand and supply evidently possesses significant influence on any kind of business. It forms the basis of understanding the various business units, the market units, and the economy at large. Basic economics focus on price and its effect on consumers’ demand for commodities since price has a huge psychological influence on the choices of a consumer. Interpretation of the law of demand and supply could therefore spell failure or success of a business. However, the law of demand and supply does not operate in isolation i.e. at ceteris paribus as the theory suggests. Other forces operate on the business at a particular time hence it experiences an interaction of forces. Economics offers various theories that help explain various economic situations and help businesspersons operate their businesses efficiently. Works Cited Arthur O’sullivan, Sheffrin M. Steven. Economics: Principles In Action, Upper Saddle River, New Jersey Pearson Prentice Hall 2003, print Binger, B & Hoffman, E. Microeconomics with Calculus. Addison-Wesley 1998 Case, K.E., Fair, R.C. (1994). Demand, Supply, and Market Equilibrium: Principles of Economics, Prentice Hall Englewood Cliffs, New Jersey Gans J.,King S.& Mankiw N. Principles Of Microeconomics. Thompson South Bank. 2003. Goodfellow N.. Plasma’s plus for Harvey. 2004. The advertiser accessed at http:/www.news.com.au/ on July 2, 2004. Gottliebsen, R. Raising Interest Rates Would Topple The Consumers. The Australian. May 2004 accessed at http://finance.news.com.au/common/story_page/0,4057,10075352%255E521,00.html on July 29 2004 Krugman Paul & Wells Robin. Microeconomics. Worth Publishers, New York. 2005 Read More