The paper 'Managerial Economics Assessment' is a wonderful example of a Macro and Microeconomics Assignment. According to posting from last fall, sales for products such as Spam, pancake mixes, instant potatoes, rice, and beans have been booming during the recession; a spokesperson from a grocery chain is quoted as saying “ They’ re real belly fillers. ” Comment on this, using concept related to any one of the elasticity discussed in class. (5 points) The price elasticity of demand is the percentage change in the quantity demanded of a good or service given a percentage change in its price.
Elasticity in times of booms is less, it rises when there is a lesser utility for lower-priced substitutes. During the recession, there is a high elasticity due to a decrease in the imperfect competition. Consumers hold critical utility levels for products. These levels occur due to the following factors such as search cost, the confidence of consumers with a market, and interest rates. An increase in interest rates in times of recession causes critical utility levels to rise and this reduces the number of customers in the market and reduces the elasticity of demand Vind, K.
(2005). The buying patterns of new and existing customers also affect price elasticity. The existing customers exhibit a low elasticity of demand due to pledges by sellers to maintain prices. New customers hold a relatively higher value of price elasticity of demand. When new customers dominate the market, there is a high elasticity of demand. Switching costs occur where customers expect favorable prices in the future. Firms can maximize current profits once they exploit customers to increase their market share due to future expectations.
The business cycle can influence price elasticity by shifting the demand curve. If RTA increases the bus-fare from Abu Dhabi to Dubai, then what will happen to their revenue? [Hint: the demand curve is inelastic] Explain your answer with help of a diagram. (10 points) Price inelastic commodities encompass basic needs availed to a society. Bus fare is a basic need for many individuals relying on public transportation on a daily basis. With the notable population increase, public transport availed by a sane governmental regime remains the safest, fastest, and cheapest travel mode. With an inelastic commodity, an extensive change in price results in an insignificant change in commodities demanded.
With the current situation in Abu Dhabi, the change in transportation expenses will not necessarily imply a similar change in demand for the services. Since transportation costs are price inelastic, a huge change in prices will resonate with a low change in quantity demanded (Krishnamurthi & Raj 2011). This is because consumers are willing and able to pay for bus fare regardless of a huge change in related costs. In essence, the change will result in an increase in revenue as consumers will pay the new set prices. Managerial Economics: Assessment 2 A local firm in Abu Dhabi is operating in a perfectly competitive environment.
If the price in the market is 4 AED and their total cost is 500 AED (including the fixed cost of 200 AED) for output of 30 units, then should they continue to produce or shut down in the short-run? Provide your answer with a relevant diagram and explain your answer in a few words.