Price Elasticity of Demand and Decision Making (Research Paper Sample)

Price Elasticity of Demand
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Price Elasticity of Demand
Introduction
This paper aims to analyse key concepts relating to the decision making in the marketing and price elasticity of demand. Initial part compares the goods in terms of elasticity to price changes followed by a discussion on the benefits of marginal analysis for decision making. Next sections give coverage to the benefits of opportunity cost, which segues into the debate about the extensions of the benefits of optimized decisions for consumers, producers, and society.
Comparison of Elasticity between Two Goods
The elasticity of demand is the change in the demand in response to a change in the price (Pettinger, 2017). The mathematical formula to evaluate the elasticity is provided as under:
Price elasticity of demand = %change in the quantity of demand/%change in price
Two products being compared in this section include speciality coffee and soda drink. Speciality coffee is a highly inelastic good as, unlike black coffee, it is not exposed to the threats from substitutes (Jones, 2015). Only specific brands can maintain a unique taste that is addicted. Besides, the consumers of speciality coffee come from an affluent background implying that price increments are unlikely to affect their purchasing power (Jones, 2015). However, the soft-drinks market is marked with intense competition. If a producer increases the price, consumers may shift to another competitor with a lower price (Guerrero-López et al., 2017). Therefore, a soft drink is a highly demand-elastic good.
For instance, if the price of speciality-coffee and soft drink rises from $25 to $30 (a 20% increase), the demand for speciality coffee will decline by 2%. Contrarily, demand for the soft drink it may plunge as much as up to 20%.
Impact of Marginal Analysis on Decision Making
As the term implies, marginal analysis refers to the comparison between the benefit and cost that each additional unit of something produces. The addition remains viable as long as benefit continues to exceed the cost. However, where the cost of an additional unit outweighs the benefit, it serves as a red-signal against further consideration (Lakmal, 2014). Even though sunk costs do not reflect in marginal analysis, entrepreneurs, marketers, and managers regard it as a highly beneficial tool enabling them to optimize their decision (Lakmal, 2014). It helps in decision making relating to expansion to new markets or increasing the scope of the production (Lakmal, 2014). The businesses can consider further expansion when the cost of reaching the next level of size is lower than the incremental cost resulting from such expansion. In this way, marginal analysis enables businesses and people, in general, to be mindful of their limits and able to utilize their optimal potential by capitalizing each opportunity and avoiding unnecessary costs.
Importance of Opportunity Cost to Decision Making and Trade
Whereas marginal analysis is broadly concerned with whether or not considering the opportunity of growth, increment, or expansion; opportunity-cost analysis help be more specific about the choices. The opportunity cost is the benefit attached to a decision that is compromised by choosing another alternative (Mankiw, 2020). The businesses apply the concept of opportunity-cost to optimize their decisions when they are exposed to multiple choices. In such situations, weigh the benefits and costs of each alternative against each other and opt for alternatives that promise the highest level of benefit at minimum cost or where the positive gap between benefit and cost is the highest (Read et al., 2017). Concept of opportunity cost is largely at the bottom of trade. Trade is the exchange of benefit between two entities where both the entities seek to maximize their gain. When an entity considers that it may incur a higher cost by producing a good than by buying it from an external provider, trade takes place (Mankiw, 2020). The same concept holds for cross-border trade where countries decide between comparative costs and benefits of producing the goods locally and importing the same from other countries.
Impact of Better Business Decision on Consumers, Producers, and Society
The ability of producers to maximize their efficiency by making optimal choices reflects the well-being of consumers and society on the whole. While assessing from the perspective of deontology, producers have moral obligations towards society. It implies that they can pass the benefit, either partially or fully, to consumers by lowering prices (Pettinger, 2017). In doing so, especially for highly price-elastic products, businesses can enjoy an increase in demand which enables them to expand further and enjoy the economies of scope and