Pricing Strategies & Specialization-Free-Samples-Myassignmenthelp

Questions: 1.As a producer, why is it important to consider the Price Elasticity of Demand of your Product when setting the price you are going to charge? 2.Explain the difference between Comparative Advantage an Absolute Advantage. Answers: 1.Introduction In most cases, producers are faced with the challenge of deciding the right price to sell their products or services. Generally, the role of producers is to maximize revenues; this in turn raises the personal wealth. So the producer aim is to sell at the highest possible price in the market while still maintaining the same demand level. This is where the concept of Price Elasticity of Demand (PED) comes in; it explains the behavior of consumers to price changes (Konrad, 2012) we have noted that despite the need to sell at high prices, the producer is also interested in the quantity sold. Lower prices encourages demand and given a certain level of income, consumers will always tend to buy more at that reduced price. High price discourages demand and given a certain level of income, consumers will tend to cut consumption level since their income is insufficient. Analysis According to Agarwal (2017), PED is important as it helps a producer in making predictions of the possible change in the quantity demanded it the price is changed. It is also offer a good opportunity for a farmer to price discriminate. Since markets are different and consumers are of different groups, elasticity vary from market to market. In the event of analyzing the PED, the producer is able to identify all the factors that increase the elasticity of a product to price change. These factors includes the nature of the goods, availability of substitutes, etc. Graph: Elastic Demand Initially, the price level was P1, at this price, the demand by the consumers was Q1. Now let us assume that the producer raised his price from P1 to a price P2, consumers will immediately respond by significantly cutting demand for this product and maybe demand its substitute goods. This is because the good is not a necessity and thus the consumers can do without, or other goods can act as a substitute (Green, 2017). The deduction here is that demand is very responsive to demand and thus very elastic. If this is the kind of goods that a producer is selling, it therefore proofs very difficult to raise the price level. Graph: Inelastic Demand The changes in price from the initial price P1 has no much influence of the demanded quantity. The demand change is too small. A producer who raises price in this case is guaranteed to increased revenues as the percentage price increase causes demand to fall by only a small percentage (Gsenviro, 2015). Conclusion Demand and supply concept is very important in pricing strategy decisions. Demand and price have a negative relationship. Producers should use historical price levels and their corresponding demand level and determine their PED. In the case of a price change, the changes in demand may wipe out the possible positive changes in revenue. The producer should be aware that in some cases revenue may be increased by lowering prices, but not always by price increments. PED should be the primary basis for pricing strategy decisions. An elastic demand is good for a price cut and inelastic demand is good for a price rise. 2.Introduction The production ability is unique to different producers. Resources available for the production of a certain good may be available in one area but a deficiency in others. An investor may be able to do a certain task at a different speed compared to another on a similar task. This brings about the concept of absolute advantage. A higher efficiency of production explain the absolute advantage concept. On the other hand, an investor may undergo another investment to make a specific one. The foregone investment may be of value that the committed investment; this brings in the concept of comparative advantage (Amadeo, 2017). The difference is explained by the basis of which every advantage is drawn from. Analysis A party that produces a good at a lower cost or at a faster pace have an absolute advantage. In a comparison of two production activities for two parties, we may find that a single party may be having an absolute advantage in both (Shenkar, Luo Chi, 2014). However, if that party carries the two tasks simultaneously, the output from each may be lower. Thus, for the party to maximize profit, it may be advisable to specialize on only one of those two production tasks. This is explained by comparative advantage where the party chooses to specialize on the task it has the lowest opportunity cost (Boudreaux, 2008). Lets consider a certain equal piece of land in different parts of a country; we may find out that if similar crops are grown at the same time using the same resources, the output level may be different. While a portion of a land may be supportive for the growth of a particular crop it may be poor for some other crops. The absolute and comparative analysis are important in that they help investors in making wise decisions; an investor by using this basis is expected to specialize on the production of that good that is more profitable to him and then make an exchange for that that he never produced. If for example party A carries out task A he foregoes doing 3 task B, and if party B carries out task A he foregoes doing 4 task B, party A has the lowest opportunity cost and thus should specialize in A. Similarly, if party A carries out task B he foregoes doing 2 task A, and if party B carries out task B he foregoes doing 1/2 task A, party B has the lowest opportunity cost and thus should specialize in task B. Conclusion Even if a country have an absolute advantage in similar activities over the other, it can still benefit from trading with that other country. Because of absolute and comparative advantage, they is plentiful supply of goods and services all over the world. This has enabled international trading which is the main source of income for many economies. Efficiency and opportunity cost differences helps in specialization and exchange. Investors should consider comparative advantage in their investments; countries should consider it as it facilitates international trading. References Agarwal, P. (2017). Price Elasticity of Demand. Intelligent Economist. Retrieved 5 August 2017, from https://www.intelligenteconomist.com/price-elasticity-of-demand/. Amadeo, K. (2017). Comparative Advantage. The Balance. Retrieved 5 August 2017, from https://www.thebalance.com/comparative-advantage-3305915. Boudreaux, D. (2008). Comparative Advantage. Econlib.org. Retrieved 5 August 2017, from https://www.econlib.org/library/Enc/ComparativeAdvantage.html. Green, J. (2017). Use of Elasticity of Demand in Business Management Problems. Smallbusiness.chron.com. Retrieved 5 August 2017, from https://smallbusiness.chron.com/use-elasticity-demand-business-management-problems-10523.html. Gsenviro. (2015). Why is price Elasticity of demand important to firms? ENotes. Retrieved 5 August 2017, from https://www.enotes.com/homework-help/why-price-elasticity-demand-important-firms-493109. Konrad, T. (2012). The End of Elastic Oil. Forbes.com. Retrieved 5 August 2017, from https://www.forbes.com/sites/tomkonrad/2012/01/26/the-end-of-elastic-oil/#478df50836d6. Shenkar, O., Luo, Y. Chi, T. (2014). International Business (3rd Ed). Routledge.