Both individuals and firms must demonstrate an economic capability to acquire, or heir wants will remain unfulfilled, and no economic demand will result Q. 2 John Baptists Say, a French economist from the early 19th century, is credited with stating, Supply creates its own demand. @ Today, some economists appear to argue that Demand creates its own supply. @ Explain why neither statement is precisely correct, and how demand and supply together create the market for goods and services. ANSWER In simplistic terms, supply is what is available, and demand is what is desirable.
In the can-do world of the new millennium, some consumers have come to believe that everything is possible ND that Demand creates its own supply. @ Alas, that is not yet the case. While many companies continue to invent new and innovative products to meet consumer needs, not everything customers desire can be supplied. For example, there is no comprehensive cure for cancer. The forces of demand and supply work together to provide consumers what they want, within the realm of technological feasibility.
The point Say was trying to make in arguing Supply creates its own demand@ was simply that there can be no general glut or oversupply of goods and services in free and competitive markets. While it is possible for temporary Gluts@ to arise for particular goods and services, these gluts will be balanced by temporary shortage or under supply in the markets for other goods and services. In a freely competitive market, permanent oversupply of all goods and services is not possible. Presented by Jungian & Lieu Yang, MGM Panel , Gudgeon University of Finance. 1 03 – Q. 2 Chapter 5 On a historical note, it is perhaps worth mentioning that while the popular expression of Say’s Law is Supply creates its own demand,@ this quotation does not appear in Say’s writings, nor in the writings of other reorient economists of his time. This Law@ was developed in the economics literature at a time when economists had begun to notice that the economic system could be subject to severe recessions. The nature of these crises, their causes, and relationship to the economic system became a topic of hot debate.
A major figure on one side of the debate was Thomas Malthusian, who argued that crises were a result of a General glut@ of goods and services. Because production could outrun people-?s ability to purchase goods and services, Malthusian argued that it was under consumption that led to secessions. On the other side of the debate were David Richard, James and John Stuart Mill, and Say who together argued that the under consumption thesis was wrong. Their ideas are today called Say’s Law. Q. Why might customers be unwilling or unable to provide accurate demand information? When might this prove helpful? ANSWER Customers are often unable to supply accurate information about their demand for particular products given an inability to verbalize the method by which they select goods and services for consumption. Even when the decision process is understood and objective enough to provide relevant demand information, consumers might hesitate to supply such data because it could place them in a poorer bargaining position with suppliers.
For example, a consumer might be reluctant to tell a retailer that he or she is willing to pay $3,000 for a sophisticated personal computer on the grounds that by withholding this information an even lower price might be obtained. Of course, providing suppliers with demand information can prove beneficial when such information improves the reliability or lowers the cost of supplied products. For example, projections of demand quantities are often provided to allow suppliers to develop the capacity necessary to meet demand, and better deal with demand fluctuations.
Q. 4 When is use of the arc elasticity concept valid as compared with the use of the point elasticity concept? ANSWER The arc versus the point elasticity concepts differ only in terms of the magnitude of the change in a given independent variable. Strictly speaking, the point elasticity Presented by Song Jinn & Lieu Yang, MGM Panel , Gudgeon university of Finance. – 104 – Q. 3 Q. 4 Demand Analysis concept is appropriate for measuring the responsiveness f a dependent Y variable to a change in an independent X variable at a given point on a function.
The point elasticity concept is often used to measure the effect on Y of small, say 0-5%, changes in X. Use of the arc elasticity concept is appropriate when considering the effect of larger changes in X. The arc elasticity is an average elasticity over a range along a given function. Q. 5 Anne I go to the grocery store, I find cents-off coupons totally annoying. Why can-?t they just cut the price and do away with the clutter? @ Discuss this statement and explain why coupon promotions are an effective means of rumination for grocery retailers, and popular with many consumers.
ANSWER At the grocery store, cents-off promotions remain an effective means of promotion. A 254 coupon turned in by 10% of all customers is said to have a 10% Response rate. @ Retailers have found that a 254 coupon turned in by 10% of all customers has a much more beneficial effect on sales than an across-the-board price reduction of 2. 54. By restricting price discounts to those customers conscientious enough to clip, retain, and turn in little bits of paper, retailers are able to target their price discounts to the most price- insensitive portion of the market.
Price-conscious consumers love >me. Interestingly, many retailers have discovered that a substantial number of customers attracted by coupon and rebate promotions buy the product, but then fail to claim the coupon or rebate. For such customers, the idea off price discount is just as good as a real price discount! Q. 6 Market demand is influenced by price, the price of substitutes and complements, product quality, advertising, income, and related factors.
Explain why companies often find price changes to be the most important determinant of short-term hangers in sales. ANSWER For consumer and industrial products, market demand is influenced by price, the price of substitutes and complements, product quality, advertising, income, and a host of related factors. Among such factors, companies often find price changes to be the most important determinant of short-term changes in market demand. Price changes are easily discovered, and both customers and competitors typically respond to them quickly.
For example, when McDonald-?s cuts the price of a jumbo order of fries, price-sensitive customers immediately recognize the change and the annuity Presented by Jungian & Lieu Yang, MGM Panel , Gudgeon University of Finance. – 105 – Q. 5 Q. 6 Chapter 5 demanded rises accordingly. On the other hand, when there is a slight change in the quality of potatoes used, or a modest change in cooking style, consumers and competitors may be slow to react. Similarly, while income is an important determinant of demand, changes in income affect all competitors, and the effect on any single competitor is thereby muted.
Q. 7 An estimated 80% increase in the retail price of cigarettes is necessary to cause a 30% drop in the number of cigarettes sold. Would such a price increase help or hurt tobacco industry profits? What would be the likely effect on industry profits if this price boost was simply caused by a $1. 50 per pack increase in cigarette excise taxes? ANSWER The price elasticity of demand for cigarettes is highly inelastic if an 80% increase in retail prices would cause only a 30% drop in the number of cigarettes sold. An arc price elasticity for cigarettes on the order Of PEP -0. 75 implies that tobacco industry revenues would rise sharply following a big price increase. Since the variable costs of producing and selling cigarettes would fall with a 30% drop n the number of cigarettes sold, a significant industry-wide increase in cigarette prices could cause industry profits to explode on the upside. It is less certain what would happen to tobacco industry profits if the price increase described above were the simple result of an increase in excise taxes on each pack of cigarettes sold. For example, a new $1. 50 tax on a pack of cigarettes would increase typical retail prices from $1. 88 to $3. 8 per pack, or by roughly 80%. If all new revenues went to the government in the form of taxes, then industry revenues and variable costs would both fall by 30% allowing a 30% drop in unit sales. Unless the tobacco industry cut fixed expenses, industry profits would fall in the long run. On the other hand, with such inelastic demand and experimentation’s price increases, the tobacco industry might be expected to lobby hard for further profit- enhancing price increases in the post tax-increase era. Q. 8 Is the price elasticity of demand typically greater if computed for an industry or for a single firm in the industry?
Why? ANSWER The price elasticity of demand for a firm will typically be greater than that for the industry as a whole. Unless the rim is the industry, as in the case of monopoly, it will face a demand curve that is flatter than that faced by the industry as a whole. This stems from the fact that demand for the industry’s product faces competition Presented by Jungian & Lieu Yang, MGM Panel , Gudgeon University of Finance. – 1 06 Q. 7 Q. 8 Demand Analysis from goods that consumers view as alternatives as opposed to close substitutes.
The firm, on the other hand, faces competition from substitute products produced by others in the industry, as well as competition from goods in general, for a place in the consumer’s overall racket basket. Q. 9 Is the cross-price elasticity concept useful for identifying the boundaries of an industry or market? ANSWER Yes, the cross-price elasticity concept provides a practical means for identifying the boundaries of an industry or market. By definition, a direct relation between the price of one product and the demand for a second product holds for all substitutes.
A price increase for a given product increases demand for substitutes; a price decrease for a given product will decrease demand for substitutes. This means that if the cross-price elasticity of demand is a very small negative umber, say APEX = -5, a strong substitute good relation exists, and the products involved directly compete for a share of the consumer’s dollar. If the cross-price elasticity of demand is a large negative number, say APEX = -0. 05, a weak substitute good relation exists, and demand for the products involved is only slightly related.
The cross-price elasticity is always positive for substitutes; the price of one good and the demand for the other always move in the same direction. Cross-price elasticity is negative for complements; price and quantity move in opposite directions for complementary goods and revise. Finally, cross-price elasticity is zero, or nearly zero, for unrelated goods where variations in the price of one good have no effect on demand for the second. The point to keep in mind is that the cross-price elasticity concept is an economic measure of the similarity or dissimilarity between products.
If the crosspiece elasticity of demand is near zero, then even products that are similar in physical terms cannot be regarded as substitutes. The demand for apparel, cosmetics, sporting goods, and a wide variety of services is such that many products that are genuinely comparable in physical ERM cannot be regarded as economic substitutes. Similarly, identical products offered at different times or places are not economic substitutes. A Coca-Cola and a brat at the ball park are not offered at the same time and place as those sold at the grocery store, and price differentials reflect that fact.
Q. 10 Collecting, analyzing and verifying elasticity of demand information is costly, and that cost is an impediment to using these data help make better day-to-day pricing decisions. @ Discuss this statement. ANSWER Presented by Song Jinn & Lieu Yang, MGM Panel , Gudgeon University of Finance. – 107 – Q. 9 Q. 10 Chapter 5 Collecting, analyzing and verifying elasticity of demand information is indeed costly, but that cost is scarcely an impediment to using these data to help business managers make better day-to-day pricing decisions.
In case after case, evidence suggests that businesses are easily able to justify the expense involved with collecting and analyzing elasticity of demand information. Profit minimization requires a comparison between the marginal benefits and marginal costs of production, including the marginal benefits and marginal costs of producing correct market demand information. For example, cents- off coupons are a well-accepted means for probing the market demand curve at price-output combinations around the current market equilibrium.
In grocery stores, information gleaned from electronic scanners is used to help adjust prices and price discounts for maximum effect. In car dealerships, detailed information is collected to determine the relative effectiveness of price rebates versus low-cost financing. In case after case, evidence emerges to suggest that manufacturers and retailers carefully collect, analyze and verify elasticity of demand information to accurately assess the market emend for their products.
