Market Influences on Business: Part I_M2

Question 1

How to maximize profits without excess inventory?

Answer 1

• To maximize profits, the price point should be set as high as possible.
• However, if the goal is also to meet customer demand without having excess inventory, the supply should not exceed the demand.

Question 2

What happens when supply and demand both increases at the same time?

Answer 2

• Price may remain the same but qty will always increase.
• When the supply of and demand for a good both increase,
  equilibrium quantity increases.
• However, the impact on price is indeterminate.
• However, if demand increases by more than supply, price will
  increase.
• Conversely, if supply increases by more than demand, price will decrease.

Question 3

What happens when the price falls?

Answer 3

Inelasticity

• The change in price will be greater than the change in qty.
• Price has a direct relationship to revenue.

Elasticity

• The change in qty will increase greater than the change of price.
• Price has a inverse relationship to revenue.

Question 4

What does the price elasticity ratio mean?

Answer 4

• When demand is Price Elastic, the implied elasticity will be greater than 1. Revenue will decline if the price for the good increases because the magnitude of the drop in demand will be greater than the magnitude of the increase in price.
• Unit Elastic Demand will have an implied elasticity of exactly 1. Which means price and demand runs opposite at the same rate of each other.
• When Demand is Price Inelastic, revenue will rise when the price rises because the decrease in demand will be smaller (relatively) than the increase in price. Inelastic Demand will have an implied elasticity less than 1

Question 5

What does perfectly inelastic mean as there NO perfectly elastic?

Answer 5

• A product with a perfectly inelastic demand would have a price
  elasticity of 0.
• Perfectly inelastic demand indicates that the demand will stay nearly the same at any price level.

Question 6

How to plot a supply and demand curve and read it?

Answer 6

• Supply and demand curves are plotted on a graph where the Y-axis (vertical axis) represents price, and the X-axis (horizontal axis) represents quantity.
• A perfectly inelastic supply curve is vertical, which means that the quantity supplied will not change regardless of what happens with prices.
• If the demand curve increases, the equilibrium price will necessarily rise as the point at which the curves intersect will now be higher on the supply curve.
• The quantity will be constant, given the vertical supply curve.

Question 7

What is Cross Elasticity?

Answer 7

Cross Elasticity (Substitutes vs. Complements) Cross elasticity measures the percentage change in quantity demanded for one good caused by a price change in another good.

• If the cross elasticity is positive, the goods are substitutes (a price increase in one will cause the quantity demanded to increase for the other).
• If the cross elasticity is negative, the goods are complementary (a price increase in one causes the quantity demanded to decrease for the other).

Question 8

What is Income Elasticity?

Answer 8

Income Elasticity (Normal or Luxury goods vs. inferior or inexpensive goods) measures the percentage change in quantity demanded given a percentage change in income.

Normal or Luxury Good
* If income elasticity is positive
* where demand increases as income increases.

Inferior or inexpensive Good
* If income elasticity is negative.
* Where demand decreases as income increases.

Question 9

What is price elasticity of QTY demanded?

Answer 9

• When price elasticity is > 1, the good is considered price elastic and the percentage change in quantity demanded from an absolute value will exceed the percentage change in price.
• Price elasticity is a measure of the sensitivity of the demand for a product to a change in price. The price elasticity is calculated by:
  % change in QTY demanded / by the % change in $
• The absolute value of the output is used, as it is assumed that a price increase will lead to a decrease in quantity demanded (and vice versa).
• Goods with an elasticity above 1.0 are considered elastic (sensitive to price changes).
• Goods with an elasticity below 1.0 are considered inelastic (not sensitive to price changes).
• When more substitutes are readily available for a product, it will mean the product is more price elastic.
• A price elasticity of demand of 2.0 means demand will change by 2x (as a percentage) for any change in price. This is called elastic.
• Perfectly elastic demand does not exist.
• Perfectly inelastic demandmeans the quantity demanded will not change when price changes.
• Inelastic demand responds less than 1x (as a percentage) for a
  change in price.

Take absolute value only for QTY dem. bcuz P and qty move opposite.

Not for qty supplied as Price and Qty Supplied move in same direction.

Question 10

What are the characteristics of Price Elasticity?

Answer 10

• The more elastic demand is, the greater the change in quantity demanded with price changes.
• Elasticity is greater than 1.0.
• A change in price is less than the change in quantity demanded.
• If price declines for an elastic good, revenue will increase because quantity demanded will increase by more than the price decline.
• If an item has many similar substitutes, its price elasticity of demand will be high. Customers can always switch to a substitute, so a change in price may affect demand substantially.

Question 11

What are the characteristics of price inelasticity?

Answer 11

• When a good is demanded, no matter the price.
• The demand “curve” is a vertical at the quantity demanded with price making no difference.
• Elasticity will be less than 1.
• Demand will stay nearly the same at any price level.
• The decrease in price will result in an increase in quantity demanded that is proportionally smaller than the decrease in price.
• Because the positive quantity effect does not fully offset the negative price effect, total revenue (which is Price × Quantity demanded) will fall.
• Total revenue would rise for an inelastic good if prices increased (while quantity demanded decreased).

EXAMPLE
* Goods that are important for a comfortable life-style would be relatively price insensitive (i.e., inelastic). For example, demand for electricity would only decrease if there were an enormous increase in price (people might then use other forms of energy - such as solar).

• If an item is considered a necessity (e.g., insulin to diabetics), purchasers will buy it regardless of the cost, and demand will not change all that much.

Question 12

What is Perfectly inelastic demand?

Answer 12

• A product with a perfectly inelastic demand would have a price elasticity of 0.
• indicates that the demand will stay nearly the same at any price level.

Question 13

What happens when demand is price unit elastic?

Answer 13

• There would be no effect to revenue.
• A price elasticity is exactly 1.0

Question 14

What changes with inflation?

Answer 14

• Wages will typically increase with inflation as workers negotiate higher wages to keep up with inflation and employers increase wages to compensate for purchasing power losses due to inflation as a means of attracting and retaining a talented work force.
• Although long term borrowing rates may be reflective of
  historical rates, they include an adjustment for anticipated long term inflation and current interest rates will automatically adjust for inflation as lenders change rates to compensate for changes in purchasing power.
• Product prices in a free market will increase with inflation. Sales revenue will reflect inflation.

Question 15

What does the inflation rate measure?

Answer 15

• The inflation rate is associated with price level changes.
• Inflation refers to a sustained increase in the overall price level.

Question 16

How to calculate the change in real cost compared to inflation?

Answer 16

With an inflation rate of 4 percent, the initial cost of $195.00 × 1.04 = $202.80.
The material cost $200 at year-end, implying an actual decrease of $2.80 in real costs

Question 17

What is the impact of inflation of debt issuance?

Answer 17

• The principal owed at maturity on a debt issuance is fixed at a specific amount, which represents the future cost.
• Inflation results in a real cost, which is below the future cost per the following formula:
  Real cost = Future value / (1 + Inflation rate) n
• The principal owed at maturity is the future value and as long as price levels are rising, the inflation rate will be positive, and the real cost will be below the future value.

Question 18

What is the biggest inflation risk to investors?

Answer 18

Inflation (rising price levels) erodes the purchasing power of monetary assets such as cash and money market accounts, as the interest paid by banks on these balances is typically extremely low.

Question 19

What is deflation?

Answer 19

Continuous or sustained decline in the overall price level.

Question 20

What are complementary goods?

Answer 20

• Any increase in average domestic air fares will decrease demand for jet fuel at all price levels, thereby causing the demand curve for jet fuel to shift to the left.
• If an increase in the price of Product X causes a decrease in the quantity demanded for Product Y.
• Answer is negative
• The demands for mutually “complementary goods” fluctuate
  together (e.g., more cereal purchases are accompanied by an increase in the demand for milk).

Question 21

What are substitute goods?

Answer 21

• A shift to the left implies a decline in demand. If the price of a substitute good decreases, the substitute good will be more attractive to consumers; this will cause the demand for a product to decline.
• A change in the price of a product will result in a change in the quantity demanded (movement along the demand curve), not a shift in demand.
• An increase in disposable income will cause the demand curve for a normal good to shift to the right (increase) rather than to the left.
• If consumers expect that prices will rise in the future, they will look to buy more today (when the prices are lower). This will shift the demand curve to the right.
• same as competitor rival product.
• Answer is positive
• For substitute goods, as the price of one good goes up, the
  demand for another, substitute good increases as consumers desire the lower-priced substitute good.

Question 22

What are Superior Goods?

Answer 22

Superior goods will experience a
spurt in demand as prices are raised.

Question 23

What are inferior goods?

inexpensive cheap goods

Answer 23

Demand declines with an increase in the income.

Question 24

What type of competitive advantage strategies are used for inferior and superior goods?

Answer 24

• Inferior goods use Low-cost competitive strategy.
• Superior goods use differentiation competitive advantage strategies.

Question 25

What are normal goods?

Answer 25

• Increases in income lead to increases in the quantity demanded.
• If price goes up, and demand is price elastic, the implied elasticity will be greater than 1.
• Revenue will decline if the price for the good increases.
• Income goes up by more of this good.
• Income elasticity is positve.
• The quantity demanded will decline when price increases.

Question 26

What are inferior goods?

Answer 26

• Income goes up buy less of the good
• Income Elasticity is negative

Question 27

What shifts supply curve?

Answer 27

A reduction in labor wages will shift the supply curve for a product to the right.

any change except for price which is movement along the supply curve.

Question 28

What shifts demand curve?

shifts to the right are good things shifts to the left are BAD

Answer 28

• An increase in the price of a substitute good will shift the demand curve for a product to the right.
• Increase in demand.
• Change in demand.
• Shift in the demand curve.

any change except for price which is movement along the demand curve.

Question 29

What does the increase in minimum wage do to demand curve and qty demanded?

Answer 29

As an increase in the minimum wage will move employers up the labor demand curve, causing the quantity of labor demanded by employers to fall and an increase in the quantity supplied of labor by employees. It does not increase the supply of labor, only the quantity supplied of labor.

Question 30

What happens to equillibrium price and quanity when supply curve shift is greater than demand curve shift?

Answer 30

The equilibrium price will fall while the equilibrium quantity will increase.

Question 31

What is the competitive model?

Answer 31

• Predicts a surplus is created when supply exceeds quantity demanded at that price (Price Floor). Hence, a surplus occurs when minimum price is set above equilibrium.
• A shortage is created when supply and qty demanded is below equilibrium price (Price Ceiling)

Question 32

What affects do price freezes have on qty demanded vs. qty supplied?

Answer 32

• A city ordinance that freezes rent prices (such as rent control and rent stabilization) may cause the quantity demanded for rental space to exceed the quantity supplied.
• Price changes cause movements along the demand curve, not shifts in the demand curve.
• Price changes cause movements along the supply curve, not shifts in the supply curve.

Question 33

What is government intervention and how does it apply to equilibrium?

Answer 33

Price Ceiling

• Is that the maximum price is set below the market equilibrium price.
• Results in shortages because the quantity demanded would exceed the quantity supplied.
• Create excess demand for the product (at its reduced price) and, consequently, a shortage.

Price Floor

• Is a minimum price that is set above equilibrium price.
• Results in a surplus in quantity demanded because quantity supplied would exceed quantity demanded.
• Results in a surplus because suppliers would supply excess product at the inflated price.

Question 34

What are the characteristics of the long run on the supply side in microeconomics?

Answer 34

• In microeconomic analysis, in the long run all supply side inputs are variable. In accounting terms, this means that in the long run all costs are variable. (e.g., the fixed cost of depreciation of a factory building becomes a variable cost when a second factory building is added.)
• Firms rather easily enter and exit the market.
• Output and price are ultimately determined by market factors.

Question 35

What are the different pricing policies?

Answer 35

• Collusive pricing anticipates that competitors will collude or conspire to maintain prices and mutual profitability. Collusive pricing undermines competitive pricing and maintains prices to external customers at levels higher than they would be in a competitive marketplace.
• Dual pricing involves appropriately assigning different prices to the same product in different market settings. Dual pricing is a sophisticated extension of competitive pricing. The prices are simply established at the levels appropriate for each market and would not result in higher prices than would be experienced in competitive markets.
• Transfer pricing is the charge made between affiliates for products or services. Transfer prices may be at any level including cost and market and do not relate to the establishment of prices to external customers.
• Predatory pricing strategies typically result in lower prices to external customers than competitive pricing. Predatory pricing (below market or even below cost) is undertaken by larger organizations that can absorb losses and deliberately do so in an attempt to drive smaller, less capitalized, competitors from the marketplace.