Running Head: PRICE & QUANTITY
1
Equilibrium Price & Quantity
Rhena Richardson
Professor Sumadi
Managerial Economics
October 28, 2016
PRICE & QUANTITY
When it pertained to Option 2, I was given the task of making sure I discovered the
quantity demand of the 3-pack unit products as the price of the product increased from 100 cents
to 600 cents per 3-pack unit. While the demand curve ended up being 200 cents, I still had to
examine the corresponding supply curve based on the given, specified equation. For example,
demand and supply simultaneously determine equilibrium market price, which equates the
desired rate of purchase quality demand over time with the planned rate of sale (quality sale)
over time (McGuigan, J.R., Moyer, R.C., &Harris, F., 29, 2014). Both concepts address
intentions, which are purchase intentions and supply intentions (McGuigan, J.R., Moyer, R.C.,
&Harris, F., 29, 2014). Basically, it all goes back to how much demand is out there for a product
that entails how many units have been actually sold. McGuigan, Moyer, and Harris (2014)
mentioned that the equilibrium price is a market or a clearing equilibrium concept that equates
the flow rates of intended purchase and planned sale (McGuigan, Moyer & Harris, 29, 2014).
The calculations of the independent variable (the price of the 3-pack unit) versus the
dependent variable (the quality demand) are in line with how the company should operate in
terms of the appropriate production and manufacturing of their products. Unsurprisingly, as the
price of the 3-pack unit increases, the quantity of demand for the 3-pack unit slightly decreases.
For example, it determines the output of each product. The relationship between cost and output
is expressed in terms of a cost function: a schedule, graph, or mathematical relationship showing
the minimum achievable cost of producing various quantities of output (McGuigan, Moyer &
Harris, 286, 2014). Cost functions includes average fixed costs that equates to fixed cost over
quantity produced, average variable costs that equates to variable cost over quantity, and average
total costs, which equate to total costs over quantity. Significant factors affecting the short-term
2
PRICE & QUANTITY
and long-term goals of the 3-pack unit depends if the company is going to continue to raise the
price of each 3-pack unit or if they are going to follow the competitor’s lead.
The fixed costs for the quantity demand equation consist of the price of the leading
competitor’s product, the per capita income of the standard metropolitan statistical area in which
the supermarkets are located, and the monthly advertising expenditures. Simply, the production
cost functions affect the strategies of individual firms. The variable input costs consist of the
costs of all the variable inputs to the production process (McGuigan, Moyer & Harris, 286,
2014), which is the price of the product of the 3-pack units. The marginal cost is defined as the
incremental increase in total variable costs that results from a one-unit increase in output
(McGuigan, Moyer & Harris, 286, 2014) in which the price of the product begins at 100 cents
and increases in increments of 100 cents until 600 cents is achieved by having that as the price of
the product. However, on the other hand, the learning curve effect has often been perceived
whereby the quantity of labor input required to produce another unit of output decreases as the
cumulative volume of output arises (McGuigan, Moyer & Harris, 292, 2014). With an individual
firm, managers are called upon to choose a certain strategic direction, to distribute efficiently the
resources made available to the organization and to reply successfully to tactical issues, which
were mentioned by McGuigan, Moyer & Harris (2014).
Similarly, the outcomes of many analyses substantiate the intuition that managerial
practices and decisions influence the cost of either providing a service and/or the production of a
product (Amy K. Donahue, 2013). Even with the competitor’s leading price of their product at
300 cents per 3-pack unit, this individual firm is still able to compete by keeping their prices
lower; however, as the firm grows and has the option of experimenting with prices, the firm
could lose their customer base and bottom line just by attempting to compete on another level.
3
PRICE & QUANTITY
Sometimes, it works, but at other times, it may backfire because it provides an opportunity for
faithful customers to look elsewhere for a similar, quality product without spending more money
for a 3-pack unit. For example, quality assurance in a global market has involved a degree of
change for many academics, which must now produce and deliver programmes not only for a
domestic audience, but also for a global audience (R. Fletcher, 307, 2007). With this individual
firm taking on new approaches and policies regarding the production of their 3-pack unit prices,
the firm may benefit from a globalization economic community (Fletcher, 304, 2007), which
garners long-term calculations and results.
Figuratively, once the optimum combination of inputs is chosen to produce the desired
level of output (at least cost), some of the inputs (plant and equipment) become fixed in the short
run; however, in the long run while using different available production methods and technology,
the firm can make more informed decisions that may yield the lowest cost of producing the
desired amount of output (McGuigan, Moyer & Harris, 291, 2014). Currently, this individual
firm has already accomplished some of this concept by maintaining lower costs, which produces
more quantity demand for the firm to eventually make more money than the leading competitor
regardless of product pricing. With managerial economics, the learning climate includes culture,
learning styles, resources, methodology, and environment (Raza, A., Murad, H., &Kayani, A.,
2010).
Individual firms and other leading competitors can dig deeper into managerial economics
by identifying the alternatives, selecting the choice that accomplishes the objective in the most
effective manner, taking into account the constraints, and recognizing the likely actions and
reactions of rival decision makers (McGuigan, Moyer & Harris, 4, 2014). The calculations for
Option 2 Regression Equation is QD= -2000 – 100P + 15A + 25PX + 10I, whereas Q is the
4
PRICE & QUANTITY
quantity demanded of 3-pack units, P (in cents) is the price of the product per 3-pack unit, PX (in
cents) is the price of the leading competitor’s product per 3-pack unit, I (in dollars) is the per
capita income of the SMSA in which the supermarkets are located, and A (in dollars) is the
monthly advertising expenditures. When the price of the product varies or changes, some of the
results or outcomes can be viewed as the following:
QD = -2000 – 100(100 cents) + 15($640) + 25(300 cents) + 10($5,000)
= 57,575 (QD) (Cents were converted into dollars)
QD = -2000 – 100(200 cents) + 15($640) + 25(300 cents) + 10($5,000)
= 57,475 (QD) (Cents were converted into dollars) Demand Curve
QD= -2000 – 100(300 cents) + 15($640) + 25(300 cents) + 10($5,000)
=57,375 (QD) (Cents were converted into dollars)
QD= -2000 – 100(400 cents) + 15($640) + 25(300 cents) + 10($5,000)
= 57,275 (QD) (Cents were converted into dollars)
QD = -2000 – 100(500 cents) + 15($640) + 25(300 cents) + 10($5,000)
= 57,175 (QD) (Cents were converted into dollars)
QD= -2000 – 100(600 cents) + 15($640) + 25(300 cents) + 10($5,000)
= 57,075 (QD) (Cents were converted into dollars).
5
PRICE & QUANTITY
6
PRICE & QUANTITY
7
References
Donahue, A. K. (2013). The influence of management on the cost of fire protection. Journal of Policy
Analysis and Management, 23(1), 71-92. doi:10.1002/pam.10179
Fletcher, R. (2007). The Managerial Tutor: A producer of knowledge in a global arena. Journal of
Higher Education Policy and Management, 29(3), 303-313. doi:10.1080/13600800701457897
McGuigan, J. R., Moyer, R. C., & Harris, F. (2014). Managerial economics: Applications, strategies
and tactics (13th ed.). Mason, OH: Cengage Learning.
Raza, A., Murad, H., & Kayani, A. (2010). Perceptions of MBA students towards learning climate for
managerial knowledge: A study of business school in lahore. Multicultural Education &
Technology Journal, 4(4), 251-260. doi:10.1108/17504971011087540
1
Running Head: Operation Decision
Operation Decision
Student Name:
Course/Number:
Due Date:
Faculty Name:
2
Operation Decision
The regression analysis has been performed for estimating the demand function for lowcalorie microwavable food. The regression equation which is derived in the assignment 1 is
given below.
QD= -2000 – 100P + 15A + 25PX + 10I
The microwavable food industry is consistently growing around the globe due to the
reason that the consumers now are not much interested in preparing homemade foods. There are
a number of reasons behind this attitude of the consumers i.e. shortage of time. Therefore the
demand of the frozen food is rendered the industry a standout amongst the most aggressive
industries around the globe. The business works in a monopolistic rivalry. Monopolistic rivalry
emerges because of the existence of few leading firms in the market and a large number of
competitive organizations. The two companies leading in the frozen food firms are Health choice
and the Lean Cuisine.
In the paper, the efficacy of the market structure from the companies’ perspective is
evaluated. This exercise and the analysis of the structure set the base for the identification of the
components that would bring a change into the structure of the market. Additionally, the short
run and long cost function applied to the data to decide if there are conditions under which
operations could be discontinued. The paper highlights the steps through which management can
decide the likelihood of uttering company operations. The pricing strategies are also discussed
for maximizing the profit and to expand the operations. At last the recommendations are made to
adopt new procedures through which organization can maximize its product line and maximize
the income of company and stakeholders.
3
Operation Decision
Presently, firms under perfect rivalry have no market control and subsequently can't
influence the market cost. They will undoubtedly offer at the progressing market cost. Now the
attributes of the market are evolving. Since the tastes of individuals are distinctive, there is a ton
of degree for item separation in this market. The sellers are likewise taking the advantage of this
taste separation and are separating their item. Consequently the sellers of the microwavable
nourishment industry are attempting to beat each other. Because of item separation, the items no
more stay homogeneous.
In the competitive market, every organization is the price taker while the equilibrium
price and the output of the product are the effects of demand and supply. The market for lowcalorie microwavable sustenance" indicates the function of demand and supply for low chloride
food produced in a monopolistic environment while deciding the output of the product and the
value costumers are agrees to pay (McGuigan, 2014).
In the completive marketplace, it’s not possible for firms to decide the higher price for
the product but the companies can control the supply of the product which can affect the price
for a specific period of time. The achievement or disappointment of an organization depends on a
purely competitive market lies in how an organization controls generation cost and depicts its
image (Slack et al, 2008).
To increase the productivity of the firm there is need to develop the new ways for
carrying out the operations of the firm. The formation of a good strategy is vital for the
usefulness of the market arrangement in which the company operates. The strategy must be
designed in a way that it focuses on the number of items available for sale, including the number
4
Operation Decision
of companies participating, pricing policy and the promotion methods used by the firm (Bragg,
2012).
According to Bragg to decide the adequacy of this market we have to substantiate the
distinctive items advertised. The frozen food industry is driven by the customer's inclinations and
cravings. Customer inclinations are inclined to consistent changes. This influences the market
structure in that it requires the accessibility of substitute products (2012).
The further step ought to be the section boundaries to the market. Because of the easy
accessibility of frozen items accessible the entry obstructions to the market are generally simple
to maneuver. Along these lines, the market circumstance is constantly defenseless against rivalry
by new firms. An organization ought to gauge the costs of its rivals and the amount offered by
the organization. This is because of the impact of costs on the demand for products.
Factors that can change Market Structure
Choice of Consumers
In the first part the assumptions are made for a perfect market competition, therefore, the
evaluation is based on the monopolistic rivalry. In this type of structure, the major role played by the
choice of consumers and the presence of barriers to enter the market. In case the preferences of the
consumer are changed the firms would be compelled to adjust its items to take care of the new demand.
Then again an organization that remaining parts willful to its creation risks losing business. It is,
therefore, necessary for the firm to be aware of new trends in this market it ought to guarantee that its
products are according to the choice of consumers and must fulfill their requirements (McGuigan, 2014).
5
Operation Decision
Advertisement / Promotion
The advertisement assumes a critical part in deciding the demand of the product. Since it
has no part to play in a competitive market, we can rule out the likelihood of the market being
perfectly focused. The market is likewise not a restraining infrastructure. This is on account of
even imposing business model doesn't require notice consumption. The requested work likewise
relies on upon the cost of another item "X" which is in rivalry with the item examined. This
totally decides out the likelihood that the market is a monopoly. In this manner, the market is a
monopolistic competitive market.
We realize that advertisement assumes an essential part in a monopolistic competitive market. In
an oligopoly market, the advertisement is not any imperative. Other than this, another notable
component of a monopolistic focused market is item separation. In our case, there are a few
firms produce different products. They marginally separate their item from their rivals to
highlight their own item and in this manner increment the market share. Consequently, this firm
is a case of a monopolistic competitive market.
Short Run & Long Cost Function
In the short run monopolistic competitive companies can earn supernormal profits, can
continue operations at breakeven, or can even incur losses. If we imagine that a monopolistic
competitive firm is initially earning an economic profit, other firms will be attracted. As with the
passage of time number of firms increase I the market then there will be more options available
to the consumers. This way curve will be moved to the left whereas there will be opposite case if
firm starts operations with losses. This will continue until and unless each firm operates at the
breakeven point. In the long run both of the firms can earn a good profit.
6
Operation Decision
Short-Run Equilibrium
Short Run Equilibrium
Discontinued Operations
We realize that the organizations can proceed with production process in the short run
even if they are facing a tough time and in the case of incurring losses in the event that it can
recuperate a portion of the variable expenses. Numerically, if P > AVC, then the organizations
will proceed with generation. In the present situation, the firm can recoup its variable cost in this
7
Operation Decision
way the organizations ought to proceed with production in the short run notwithstanding
acquiring misfortunes. Over the long haul, there are no settled expenses. The organizations are
just left with variable expenses. In the long run, organizations can win financial benefits.
The company should discontinue its operation when the price falls below the minimum
point of the average cost curve. In order to deal with such situation, there is need to indulge in
Research and development for investigating the cause and management must try to introduce a
new cost effective method of production, this way firm can restart its operation.
Pricing Policy to Maximize Profit
To maximize its profit, the company will equate its MR with MC. We can get the same
condition from the first order condition of profit maximization.
Profit (π) = TR - TC
= P×Q – TC
According to the FOC of profit maximization, we get
𝑑𝜋
𝑑𝑄
=
𝑑(𝑇𝑅)
𝑑𝑄
-
𝑑(𝑇𝐶)
𝑑𝑄
: P is not fixed
= MR – MC = 0
Therefore MR = MC
If the organization has a market control as appeared above, then the firm will appreciate a
supernormal benefit. With a specific end goal to keep up its benefit and imposing business model
position, the organization must bring about a few expenses to limit entry in the market. In this
way keeping up monopoly model will be the real concern for the organization. In the short run, if
the monopolist is gaining supernormal benefit, more firms will be pulled in. The market output
8
Operation Decision
will ascend, therefore. Advertise cost will likewise fall and this procedure will go ahead until the
whole benefit is depleted. Now every firm will work at their breakeven point. In this manner,
maintaining monopoly infrastructure over the long period will be difficult.
9
Operation Decision
References
Bragg, M. S., (2012). Financial Analysis: A Controller's Guide. (2nd Ed.). John Wiley & Sons.
Slack, N. & Lewis, M. (2003). Operations Management: Critical Perspectives on Business and
Management.
McGuigan, J. R., Moyer, R. C., & Harris, F. H. deB. (2014). Managerial economics:
applications, strategies and tactics (13th ed.). Stamford, CT: Cengage Learning.
Enke, S. (n.d.). Profit Maximization under Monopolistic Competition. The American Economic
Review,
Vol.
31,
No.
2,
317-326.
Retrieved
from
http://www.jstor.org/discover/10.2307/362?uid=3738256&uid=2129&uid=2&uid=70&ui
d=4&sid=21102582087203.
Purchase answer to see full
attachment