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Economics Paper - Essay Example

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Pricing strategy would be based on the prevailing foreign exchange rate, which is beyond the company control. However some other external cost must be considered so that the company doe not operate at a loss. Some of these cost include:- foreign or shipping cost, insurance cost, storage costs among others…
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Economics Paper
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Economics Paper

Download file to see previous pages... On the other hand if the local currency is strong, the foreign rate of exchange will be high thus making company's products to be expensive. At this situation, the company may opt for a domestic market for its products.
In domestic market, the company has some power to decide on the price of its products. However this will depend on market structure of its product i.e. Whether it is a perfect competition, monopoly, or duopoly.
In perfect competition market, the pricing strategy will be based on the forces of demand and supply of its product, which will be determined by the level of competition from other players in the market. Perfect competition market has a perfect elastic demand curve. Here the market determines the equilibrium price level. At this equilibrium price, the company will sell as much as it can. A slight increase in price will mean the company will sell nothing.
In monopoly market structure, the company has the sole power to decide on the price it will sell its product. That is why monopolist is known as notorious in charging higher price of their products. Monopoly can interfere with the demand of its product by lowering it's output here the prices will go up and make more profit.
In case of the company being a duopoly, it may collude with the other company that produces the same type of product and charge high prices provided that, there is trust between them. Therefore pricing strategy here will be dependent on trust and cooperation among the two market participants.

Question two
Most companies are profit maximizing and therefore their core objective is to maximize profit. However others aim at maximizing their sales. Profit oriented searcher will aim to produce the quantity and charge the price given by the point where marginal revenue equals marginal cost. This is as illustrated in the diagram below

Price searcher aiming at maximizing sales will produce as a point total cost curve (TC) cuts total revenue curve m (TR) i.e. at the highest point possible. This is as illustrated below.

Price searcher aim at maximizing sales, if his intentions are to promote the welfare of the producers i.e. to create the market to the producer's products.
In a nutshell, price searcher must therefore choose between maximizing profit and maximizing sales.
Question three
Elasticity refers to the responsiveness of quantity demanded or supplied due to change in prices or income i.e. Change in quantity demanded or supplied due to a unit change in price or income. In this scenario I would expect demand for a specific brand of running shoes to be less elastic than the demand for running shoes in general. This is because specific brand limits the taste and preferences of a customer. This in turn limits the ability of the customer choice from a wider variety. Therefore a change in price of that specific brand is likely to be highly elastic. Consumers do not have substitute.
Demand for a general brand of shoes will be more elastic since customers have ...Download file to see next pagesRead More
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