Impact of Elasticity of Demand on Price in the Market - Research Paper Example

? Managerial Economics Question: Would firms increase their revenue if they were to lower hearing aid prices? Evaluate the situation by doing a critical analysis? Answer: Kochkin (2005) states that though 31 million people suffer from hearing deficiency in the U.S. yet only 7.3 million or only 23.6 percent of them uses hearing aids. It will be interesting to find out why it is so. Hearing aid is not yet so full proof a device to equate it with refractive lenses used to correct the vision of eyes. So as to say, no hearing aid restores the hearing in a most natural manner. Often, the patient needs to adjust with the hearing aids and usually it takes quite a long time failing the endurance of the patient. Social stigma is also a reason for the people not to use the hearing aids as they are likely to be tagged as old and not-so-smart people in the society. It is general perception that price is a chief attribute to penetrate the market but often it is not true for several reasons as has been found in the case of hearing aids too. Price becomes important when consumers view two or more competitive products fulfilling their needs in equal terms. When product differs in their attributes and users see one of them clearly fulfilling their needs in all respects, price becomes a secondary issue. Often, people pay higher prices for a product that meets their needs in clear terms – establishing superiority over competitive products. Amiani (2007) has explored the various attributes that measure elasticity of demand for a product or service. Demand is said to be elastic when total revenue decreases on raising the product price. In contrast, the demand is said to be inelastic when total revenue increases on raising the product price. Some of the attributes, which can decide about elasticity of demand for the hearing aids, can be described as per the following. Hearing aid is an important product, which must have unique features to satisfy the customer needs. Unfortunately, most of the hearing aids available in the market fail to satisfy the customer needs. Hearing aids are in the market since several decades yet consumer perceptions on this product have not changed. Hearing aids are not perceived to be user friendly at the first place. This is one of the major causes for not an appreciable change in the user perception in last several decades. That is to say till date hearing aids suffer from inelastic demand of the market. Hearing aid technology is not yet matured enough so that consumer can differentiate among the products and its attributes. In other reason, hearing aids require a considerable investment for the patient as it falls out of insurance coverage. Hearing aid yet does not have any substitute in a real sense making it inelastic to the market demand. Amiani (2007) asserts from the past research of ‘Lee and Lotz’ as well as ‘Kochkin’ that hearing aids do not exhibit high elasticity of demand and the reasons are many and varied as mentioned earlier. From this perspective, it makes no sense to reduce the price to increase the revenue of the firm. On the contrary, any such attempt may bring down the revenue of the company. Question: Evaluate different possible strategies that companies could implement to gain a sound position among their competitors in this hearing aids market. Use relevant theoretical concepts discussed in chapters. Answer: Revenue is a function of product price and the corresponding sale in numbers. Any marketer would be interested to increase the revenue and thereby the profit of the firm. Amlai (2007) has already demonstrated that hearing aids are price inelastic to their demand. Given inelastic nature of demand, as in the case of hearing aids, any reduction in price does not come with corresponding increase in the sale of the product. Marketer needs to explore some other means to expand the market. Currently, only 23.6 percent of the people use hearing aids of the total potential that makes up to 31 million. Even one percent expansion of the total potential will create the market for 300,000 pieces of hearing aids. Some of the strategies that can be adopted to expand the market can be listed as per the following. Product Differentiation In the products such as hearing aids, the product differentiation is must to win over the competitors. Customer needs to be convinced that here is a product that can meet their aspirations and needs. Most customers are reluctant to try because they have a perception that hearing aids do not work as they have been getting the feedback from the other users like this for years. It is needed to emphasize that new advances in technology have made huge improvement in the current generation hearing aids. They are just like mini-computers in ears. They are capable of adjusting to different audio situations. The newer designs amplify only those sounds, which are required but suppress background noise and that increases hearing ability of the user. Currently, hearing aids are the digitized sound processors just like smart phones and work very well to amplify only useful sounds and that needs to be conveyed to the user emphatically (Consumer Guide to Hearing Aids 2007). Establishing New-age Product Attributes The stigma that prevents person using hearing aids is an old phenomenon that needs to be corrected by proper counseling. Many still perceive hearing aids as old large conspicuous devices that created this stigma. The latest versions of hearing aids are often micro devices that are not visible easily. Even they can be installed in the inner canals so that are not visible at all (Consumer Guide to Hearing Aids 2007). Restoring Security through Buy-back Guarantee As already demonstrated, the high cost is not a deterrent provided customer is convinced that this is going to work for them. This added confidence can be provided to the customer by 30 days' buy-back guarantee clause so that if they do not find the device suitable they can return it and get their money back. Affordability Aspect Many consider hearing aids an expensive product and plead that they cannot afford it. For such persons when they are convinced that product can meet their needs; they will always be ready to buy it. They can be given the option of procuring it on easy monthly installments lasting 12 -18 months. Most of them will find the option attractive and will readily buy the hearing aids. Proper counseling and the product differentiation strategy can do wonders in changing the perceptions of the users. Additionally, buy-back provisions or money-back guarantees can raise the confidence levels of the potential users in hearing aids market. These measures can certainly open up new vistas and expand the market for the hearing aids products. Question: What economic conditions are relevant in managerial decision-making and how they are related with the typical types of risk faced by a firm? Answer: In today’s dynamic world, economic conditions play an important role in managerial decision-making process. A firm faces numerous risks in the marketplace that include investment risk, financial risk, currency exchange fluctuation risk and many more. Many local and global economic conditions play a critical role in myriad of managerial decisions of the firm depending upon its level of operation. Some of the economic conditions can be described as per the following. At macroeconomic level GDP growth rate, employment scenario, interest rate, inflation are the key economic parameters that play a significant role in the success and failure of key decisions that any manager needs to take for the survival and growth of the firm. GDP Growth Rate GDP growth rate is an important parameter at the macro level that indicates the overall trend of the economy. The rising trend of GDP would indicate about burgeoning economy and an investment made during the period will witness increasing demand of the products in general signaling a favorable environment to a firm for a healthy return on the investments made. Unemployment Rate Ruling unemployment rate in the job market and the related trend will indicate about the aggregate demand in the economy and any company, whether big or small, would be impacted by it. If the firm enters in the market when unemployment rate is high and likely to remain at that level or more for several quarters then that may not augur well for the firm as the company is likely to experience subdued demand of its products. Interest and Inflation Rate Similarly, high inflation and interest rate also affect investment decision of the firm. Usually, companies would like to have stable environment with constant input pricing while making any business decision. In the same way, no company would prefer debt at high interest rates as that is a long-term burden on the company pushing up the cost of goods produced. High interest rate may erase the competitive edge of the company Currency Exchange Rate Currency exchange rates and its fluctuations are important for the companies who invest and market their products in the overseas market. The currency rate fluctuation depends upon the host of other factors that decide about the demand and supply of the currencies. Stable currency rate regime is usually preferred by companies to take business decisions so as to provide stability to the operations of the business. Even trade balance report about the countries can be a good indicator about the trend between the two currencies under consideration. Currency risks decide about the investment and financial risks involved in any major foreign exchange transaction of a firm. Monetary and Fiscal Policies Monetary and Fiscal Policies give a direction to the economy tackling the issues of inflation, unemployment rate and managing aggregate demand and supply dynamics. Federal Reserve releases the “Beige Book” eight times a year that speaks about the status on current economic conditions and that is a good measure for any manager to make a business decision (Barnes, 2012). This amply proves that one cannot overlook the macroeconomic parameters as that play a critical role in survival of the firm in a competitive market arena. These macroeconomic aspects of the economy influence many decisions that manager needs to take on day-to-day basis. Question: Analyze the effects of the law of diminishing returns to a modern-day business. Why this law is considered a short-run phenomenon? Use appropriate examples. Answer: When long run average costs increase with output, we have diminishing rate of return; in contrast, when average costs fall with output, it can be described as increasing rate of return or economies of scale. Froeb and McCann (2009) argue that the law of diminishing returns is basically a short-run phenomenon that arises due to fixation of one factor of production such as manufacturing capacity or capital. Such bottlenecks can be eliminated by installing more machines or hiring more workers. This essentially converts fixed costs into variable costs in the long run. They argue that the law of diminishing rate of return was ruling in the poultry industry in US; however, between 1967 and 1992, the production of chickens and turkeys rose from 2.6 billion to 7 billion despite reduction in the processing facilities from 215 to 174, thereby reducing the processing cost of poultry industry in larger plants. In fact, the contribution of 400 employees increased from 16 percent to 83 percent for turkey production and from 29% to 88% for chicken production during this period due to huge changes in technology (p.86). Learning curves play a pivotal role in reducing the cost of production. Learning curves help reduce future costs. The typical example is large airplanes manufacturer such as Boeing. Every time doubling the production capacity, marginal cost keeps on decreasing by certain percentage points. This happens purely due to the learning curves philosophy in a high-tech industry. Obviously, the law of diminishing return does not apply here in the long run. This is true where numerous processes are involved in the manufacturing of a product and the industry is in a continuous learning curve mode (Froeb and McCann, 2009 p.86). Technology is the area where the law of diminishing return has been found to be failing as observed in the last decade. Technology continues to raise the productivity levels in many areas, especially in communication, thereby reducing the marginal cost of production. There is no doubt that the technology has created new possibilities surpassing previous productivity levels by any standards. New internet technologies, Superfast PCs, Smart Phones and many such devices have defied the law of diminishing returns in a true sense (Chan, 2012). From the above examples, it is sufficiently clear that the law of diminishing returns is a short-run phenomenon in modern-day businesses. References Amiani, A.M. (2007). Impact of Elasticity of Demand on Price in the Hearing Aid Market. Audiology online. Retrieved August 15, 2012 from http://www.audiologyonline.com/articles/article_detail.asp?article_id=1757 Barnes, R. (2012). Economic Indicators: Beige Book. Investopedia. Retrieved August 15, 2012 from http://www.investopedia.com/university/releases/beigebook.asp#axzz23bJBPu6r Chan, C. S. (2012). Technology defies the law of diminishing returns. Computerworld. Retrieved August 15, 2012 from http://www.computerworld.com/s/article/9226726/Technology_defies_the_law_of_diminishing_returns Consumer Guide to Hearing Aids (2007). AARP. Retrieved August 15, 2012 from http://assets.aarp.org/www.aarp.org_/articles/health/docs/hearing_guide.pdf Froeb, L. M; McCann, B.T. (2009). Managerial Economics: A Problem Solving Approach, second ed. South-western Cengage Learning. Mason. Print. Read More