The sample below is a part of a larger managerial economics assignment. It analyzes how the supply and demand correlation works for two companies with different approaches to packaging materials amidst the COVID pandemic. Crafted by a competent essay writer, this assignment about managerial economics is meant to give you a clear idea of what teachers expect to see in a college-level piece. If this seems too hard or you’re pressed for time, our experts can help you out and develop an entirely original managerial economics assignment example paper and tailor it to your individual requirements and specifications.
Managerial Economics: The Supply and Demand of Cardboard and Metal Boxes for Home Deliveries
The demand quantity is inversely related to the product’s price, according to Webster (2014). Highly-priced products tend to have high elasticity since consumers’ demand increase with decreasing prices. In this context, some of the demand factors that are important in determining the specific supply and demand of cardboard boxes are consumer income, price levels, availability of substitutes, and consumer expectations. On the other hand, crucial supply factors for cardboard boxes are the number of firms and price or related goods.
Although both the Cardboard boxes and Metal boxes operate in the same market, their operational dynamics differ. For instance, essential supply factors that affect specific demand and supply for metal boxes include the number of firms and the production technology. On the other hand, the demand factors include tastes and preferences, sales taxes, and the number of consumers. If all produced metal boxes are bought, there will be no surplus nor wastage, hence clearing the market efficiently. A balanced situation that happens due to equal demand and supply in a perfectly competitive market is called equilibrium. As per the graph, this scenario will be experienced at point (Q=25, P=45) where the demand curve meets the supply curve creating an equilibrium.
Both the cardboard and metal boxes are operating under the same market structure, the perfect competition. Due to the nature of the products, the packaging industry is unique in the sense that it comprises several small firms producing identical products with different branding. Each of these firms contributes to the market in small quantities; hence, the market determines the price of products (Webster, 2015 p.173).
Price elasticity refers to the sensitivity of demand or supply to the changes in price. As shown in Tab 3, it is obtained by dividing the percentage change in quantities by the percentage change in prices. The price elasticity of demand is the percentage change in the demanded quantity given a specific change in price.
Given the cardboard box’s price elasticity of demand, the company should take the following actions in setting the price:
- Consider the consumers’ sensitivity to changes in income. An increase in consumer income will be directly proportional to the demand for specific products. Therefore, the company should ensure that its pricing strategies align with the target consumers’ budget constraints.
- The availability of substitutes should also be taken into consideration. The more substitutes in the market, the higher the competition.
Actions the company should take in setting the price of the metal box given its price elasticity of demand:
- Embrace price skimming. The company should consider increasing the price of the metal product to maximize its profit despite the possibility of decreasing the number of consumers. After the market is saturated, the prices can be lowered.
- Implement the adjustment period. Usually, consumers become less sensitive to price changes in the short run (Webster, 2015). However, demand may fall to or close to zero if a certain price is reached. Hence, the management should implement the adjustment period with every price change to see how it affects the demand, and the company stays afloat as the adjustment occurs.
Key factors that the company should consider assuming the price elasticity of supply for a cardboard box is elastic:
- Availability of resources. Given that supply is considered elastic if there is a significant change in supply with a slight price change, the company should consider the availability of resources for the production of the cardboard boxes.
- Mobility of production factors. The organization should ensure that at any given time, the factors of production are mobile and can be moved where the demand is to ensure that both the supply and price are stable.
Key factors that the company should consider assuming the price elasticity of supply for the metal box is inelastic:
- The length of the production cycle. Considering the minimal changes in supply with a price change, the company should minimize the production process without affecting the income generated.
- Storage of finished products. Due to the inelasticity in supply, the metal boxes will need appropriate storage spaces.
Cost, Volume, Profit
The key variables and fixed costs associated with the cardboard box and the metal box
The variable costs include wages, cost of goods sold, utilities, and raw materials used in the production process. The fixed costs include the interest paid on capital, depreciation, and property taxes.
Determining the marginal cost of the cardboard box
Marginal cost represents an increase in cost that occurs during the production of additional units (Mankiw, 1997). The marginal cost for the cardboard box can be determined by dividing the total change in the production cost of more boxes by the change in the number of boxes produced.
Determining the marginal revenue of the metal box
The marginal revenue measures how the revenue changes because of an increase in the quantity or production level. The marginal revenue for the metal box can be determined by dividing the total change in revenue by the total change in output quantity (Mankiw, 1997). For example, the value of Q = 36,000, and it returns a revenue of $54,000. An increase of Q to 36,001 would change the value to $53,999.70, making the marginal revenue $0.30. This implies that a slight increase in production volume given a downward price adjustment decreases the revenue by $0.30 for every additional unit produced. Therefore, the marginal revenue of the metal box equals the sale price of an additional item sold.
Calculating the break-even point for the Metal box
Since the break-even point is equal to the fixed costs divided by the difference in variable costs and units, I would use the following formulas:
- Break-even Point in Units = Fixed costs / (Revenue per unit –Variable cost per unit)
- Break-even point in Dollars = Fixed costs/ Contribution Margin
Conditions for profit maximization for cardboard boxes
- If the marginal cost is less than the marginal revenue in the short run, the cardboard box can increase its profit margins.
Conditions under which profit maximization would be inappropriate for metal box
- If there are barriers to entry. Increasing the prices for profit maximization in a market with barriers to entry could encourage competitive firms to enter the market and pursue market share by having lower prices.
- Highly competitive environment. When the competition is high in the industry, increasing the price could make the other firms increase their prices, making the demand inelastic.
Overall company financial objectives:
- Increasing the margins;
- Increasing profitability;
- Business continuity.
- The company should embrace more marketing strategies for the products. Creating product awareness through social media campaigns, banners, and other advertisement channels could increase product awareness, increasing market share.
- The company could add more complementary services or products. This move will ensure consumer loyalty, increasing sales.
- The organization could also explore other markets outside its geographical location. This could encourage growth and business continuity.
Mankiw, N. G. (1997). Principles of Economics (1st Ed.). Harcourt
Webster, T. J. (2015). Managerial economics: tools for analyzing business. Lexington Books