Choose two real-world companies in different industries, one that you feel faces

timer Asked: Sep 29th, 2014

Question description

We know that the demand for a good depend on its price, as well as on the consumer income and on the prices of other related goods. For example, if the price of coffee increases, the quantity demanded will fall.

Elastic Demand Company.

  In all over the world Apple is a well known company which is a premium brand of computers and smart phones. Firstly as we know that our company is Oligopoly Company because there is more than one party in the industry which is producing same product like Apple. I can’t deny that apple has a very good market value and the company has developed very well. The price of a Macbook has increased due to increase in price; our company quantity demanded has a large decline due to increase in price which shows that demand is elastic.

  We also know that the optimal output decision for a profit maximizing firm involves setting quantity such that marginal revenue is equal to marginal cost. This implies that if apple is changed prices from current levels, then the percentage in quantity demanded would exceed the percentage change in price. If our company raised prices from current level then revenue would decline due to disproportionate decline in quantity demanded. The question is how we could maintain sales in the market if we increased the prices.  Therefore, Apple will generally prefer non price competition to price competition. Under monopolistic competition, price competition may lead to price wars. Since each firm under monopolistic competition sells a slightly differentiated product, they want to highlight the distinct features of their product by advertising and thereby increase their market share.

Inelastic Demand Company

General Motors Company, commonly known as GM, General Motors produces vehicles in 37 countries under thirteen brands: It has a good brand loyalty. It enjoys a cost advantage. There is also entry barrier in this industry – high entry cost. Different companies trying to enter this industry face a high fixed cost which discourages entry. The GM Company thus enjoys monopoly profit. Hence even if price increases, people are still compelled to use railways as their means of transport. Hence its demand is inelastic.

Price elasticity is very important in determining prices we should set higher mark up over cost where customers are relatively insensitive to price (i.e., demand is inelastic) under monopoly, there is a single firm producing the entire output. Since he is the sole producer of the product in the entire market, the can influence the market price and has a market power. The profit maximizing behavior of a monopolist is given below:

Profit (π) = Total Revenue (TR) – Total Cost (TC)

With inelastic demand, increase prices because revenue will increase and total cost will reduce (quantities sold will reduce).

In situations of very inelastic demand, customers are not sensitive to price. Quality, service, product mix and location are therefore most important to a firms pricing strategy.

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