The Price Elasticity Of Moisturizing Cream

The Price Elasticity Of Moisturizing CreamConsidering the above table, we find that the quantity demanded has increased from P0 to P4. entirely we do non see a signifi tummyt step- bundle in the set of the product. Does that mean that moisturizing cream is price inelastic? The answer to the question is NO. Moisturizing cream is definitely price elastic. But price is non the only factor that affects the demand of the cream. The other major factor that affects the quantity demanded is Advertising cost.Moisturizing cream tolerate be considered as a non essential luxuriousness durable approximate. According to Sethuram and Tellis ( in Farnham 2010,p 96), durable goods have impoverisheder price elasticity than non-durable goods. Usually consumers relate a higher price of durable good with a high quality. Hence they post pay higher price for a product. The non durable goods are more price elastic since consumers are not ready to pay more price for an item that will not last for a long time.According to the food marketing study of Sethuraman and Tellis (in Farnham 2010 p 97) producers should cut down their strategies on ad policies for cosmetics, luxury goods and new products. Higher advertising cost will help in creation of brand value and increase the gross revenue of the product. Higher advertising will project the superiority of the brand with respect to the other brands (if done correctly).As seen from the table, the demand curve drawn would have supportive face. A demand curve with positive slope is common in markets that exhibit Conspicuous Consumption and the products that are categorized as Veblen goods.In the wager, the highest market shares were experienced by households that had the highest advertising be.Considering the performance of the extinctflank 2 firms on the undercoat of bring in and market share for five periods of GRITAIN MOISTURIZING CREAM INDUSTRYIt can be clearly seen that the market share is influenced by the advertisi ng cost. In P1, firm 38 had a market share of 32.8% though its price was a lot higher than firm 35. This shows that when the advertising is higher, the quantity demanded for products like moisturizing cream and other beauty products is higher, irrespective of the country. Let us analyse the elasticity of Cement by considering the PIELAND CEMENT INDUSTRY. Again considering the performance of the best 2 firms in the first five periods on the basis of market share and profit we haveOn considering P2, it can be found out that the market share of firm 7 is much higher than its closest competitor firm 9 in spite of the fact that firm 9 spent heavily on advertising. This shows that consumers demand more building blocks of cement if it is cheaper, making it highly price sensitive. It has a misfortunate price elasticity of demand. It was observed that making profit was highly difficult in the cement assiduity. A right mix of advertising and pricing schema was required. A very low price would help in achieving a good market share but would make it very difficult to leave even.According to Dr. Divina M. Edralin (2004) The cement industry is highly capital- intensifier, as it needs substantial investments in fixed assets like plant and equipment. The industrys main product is characterized by low price elasticity of demand, limited shelf life, and expensive handling and transportation cost for imports. According to Dr Edralin, globalization has provided opport building blockies to transnational cement corporations to monopolize the worlds cement industry by managing the economies of scale because of their large capital investments and thus making it difficult for smaller domestic firms/factories producing cement.PART B PRODUCTION AND COST ANALYSIS (SHORT stretch forth AND LONG RUN)SHORT RUNConsidering the firm 28 in Pieland Moisturizing Cream Industry, the short run cost functions can be interpreted by feel at the total fixed and variable cost, average fixed and v ariable cost.The functioning of the firms of various industries from P0 to P4 can be considered as short run as the firms were not allowed to increase their capacity. Thus the capital input remains constant in those periods.Fixed Costs = Overhead costs + Interest on negative balance + advertising costs + depreciation (These costs are not related to the production). As advertising costs have increased because of managerial decisions, they can be categorized as discretionary-fixed costs. Depreciation is considered as a fixed cost because it is figure on the basis of time and not on the basis of number of units that a machine produces.Variable costs = $2 per pot of moisturizing creamDepreciation is 5% per period reach calculation was done as total revenue total costsIf we combine the above both periods for firm 28, we haveTotal Revenue = 183200(period 1) + 252000(period 2) = $435200Total Costs = 159800(period 1) + 191698(period 2) = $351498Total Profit = $83702Total sales = 46900 p otsProfit per pot (combined P1 and P2)= $1.78Profit for P1= 23400 (183200-159800) = Profit per pot = 23400/22900 = $1.02Profit for P2=60302 (252000-191698) = Profit per pot = 60302/24000 = $2.51As we can see, the profit has increased in the period 2. In real life situations where most of the durable products are quite price elastic, the managers have constraints of not increasing the product price (unlike the game). The costs of running the firm increases gradually as more competitors enter the industry and companies spend more on advertising costs. This costs the profits to reduce by and by some time and the firms are forced to innovate new products and strategies.This can be overcome by the economies of scale as well as by increasing the price per unit. In a luxury non-essential item such as moisturizing cream, it can be done by increasing the price per unit as moisturizing cream is more advertizement elastic and consumers are ready to pay a higher price. This can be seen in the prices of the best performing teams of Pieland moisturizing cream industry.Just 5 periods have been shown as the firms had the provision to increase their capacity from P5.If we consider the Pieland Cement Industry and analyse the pricing scheme of the best two firms we can interpret that to survive in the industry, it is very essential to keep the price low as cement is not very advertisement elastic and highly price elastic.This makes cement industry in any country highly vulnerable to competition. Hence the cement firms have to work in collusion to survive in the market. The cartelisation mode of functioning is very common in this industry. The case of collusion is not seen in the game as two out of four firms have made huge losses.LONG RUNAccording to Farnham (2010167) moisturizing cream industry in the game has adopted the capital intensive method of production because there is a provision of buying large large quantities of capital investment.Considering the firms of Pieland Moisturizing Cream, a comparison can be done mingled with capacities of two firms one which did not increase the capacity and the other which increased the capacity.The cost per unit for each of the above periods for the firms would beThe cost per unit is calculated as (Overhead+Variable costs)/ Units produced for simplicity.The cost due to negative interest and the advertising cost have not been considered for the calculation. Above it can be seen that the cost per unit in P1 for firm 25 is more than firm 28. This is because the capacity utilization of firm 25 is lesser than firm 28. Firm 25 produced 12000 units in P1 whereas firm 28 produced 18000 units in P1.As it can be seen in Table B.7, the cost per unit for firm 28 has reduced consistently from P1 to P7. It is easier for firm 28 to breakeven quickly and sell the units at reduced prices and drive firm 25 out of competition. However, it was observed that when the capacity of the firm was increased from 45000 to 50000 units, t he cost per unit came out to be the same $3.87. This can be correlated with the graph of tokenish Efficient Scale. According to Farnham(2010178), the Long Run Average Cost curve becomes essentially flat with neither further economies nor diseconomies of scale.$4.11$3.91$3.87Q=35000 units ( Minimum Efficient Scale )The Long run average cost curve for firm 28 depicting Minimum Efficient Scale.Capacity Utilization Ratio (Production/Capacity) of Firm 28 is higher than Firm 25 in Pieland Moisturizing Cream Industry. The stocks not interchange are to a fault used to determine whether the firm needs to increase its capacity or not. Firm 28 has a higher capacity utilization ratio and has sold stock in most of its periods. So it gives it the incentive to expand its through investment in new structures and investment. Usually a ratio higher than 85% gives the incentive to increase the capacity according to Farnham (2010 p 352). For firm 28 the ratio is more than 95%.PART C OLIGOPOLY AND GA ME THEORYThe game theory models can be linked to the PIELAND MOISTURIZING CREAM industry. Moisturizing cream is highly advertisement elastic. This makes all the firms in the industry incur high advertising costs in each period. Consider the advertising costs for some of the periods for various firmsAs it can be seen, all the firms in the industry have unceasingly increased their advertising costs. It started with $30000 at P0 and ended up in millions. Majority of the firms ( 3 out of 5) suffered huge losses because of this. Advertising heavily in either period was highly essential to survive the competition and sell the product (referring table A.1 above).Thus in every period advertising heavily was the sovereign strategy for each firm. If the firms had co-ordinated their strategies, the advertising costs would not have reached millions. They could have sold the cream pots at higher price with minimum advertising cost. all in all firms ended up worse off than if they had been ab le to co-ordinate their strategies. All firms became prisoners of their own strategy particularly firm 25, 26 and 27 considering the final profit figure in table C.2 (Farnham 2010 p258).Though firms 28 and 29 made profits their profits could have been higher if the firms in the industry had co-ordinated and followed a co-operative oligopoly model. But the fear of punishment prevented the firms to collude (punishment from anti-trust/anti-cartel in real world).If the advertising costs of Firm 28 are considered in particular, they have increased with every period. However, the advertising cost in P14 of Firm 28 was the lowest in the group. It was known well in advance that P14 would be the final period of the game. If Firm Id 28 had kept advertising costs similar to the other firms and for some reason it would have been unable to have good sales, my firm (firm 28) would have incurred huge loss. The lesser revenue would not have negated the effect of high advertising cost and my existin g positive balance would have turned into negative. This made me reduce the advertising. The price was also brought down ( as seen in table C.3). The highest risk that Firm 28 faced during this period was Overhead cost = (-$84213) Variable Cost = (-$63000) (production was brought down as lesser sales were anticipated) Advertising = (-$100000) Total = (-$247213)The positive interest was $2897. Thus the net risk becomes (-$244316). The balance in firm 28 was $289728.51 as on P13. Thus if there are no sales in P14, there is still a positive balance of around $45412.51 ($289728.51 $244316).I considered this strategy as the best for my firm regardless of the strategy that other firms choose. I consider this scenario as the Nash Equilibrium because from a set of strategies, I have chosen the best strategy considering that the other firms will also choose their respective best strategy (Farnham 2010 p 258).PART D IMPACT OF MACROECONOMYThe macroeconomic scenario can be evaluated on the ba sis of the total quantity demanded for a particular product. Let us consider the Pieland and Gritain Moisturizing cream industryAs it can be seen from the table, the quantity demanded for units in Pieland as well as Gritain has grown in each period (except in P14 for Pieland). However, the quantity demanded curve shows a steep slope in Pieland in comparison to Gritain. This shows that the growth rate is higher in developing countries than the developed ones.The quantity demanded has a lesser slope for periods between P1-P4 since the pecuniary form _or_ system of government was deflationary. The consumption of a non essential luxury item such as moisturizing cream is less. However, from P5 the consumption increased as the monetary policy was reflationary (interest judge were cut) causing people to spend more on cosmetics. Reflationary fiscal policy causes the reduction of either the direct or indirect taxes. This leads the people to consume more.The reflationary policy caused accel erated growth from period 10. But accelerated growth caused inflation. It can be inferred from the graph that the governments and banks increased the taxes and interest rates. This brought the consumption down which is apparent from P13-P14. The do of fiscal and monetary policy were more easily visible on emerging/developing economy of Pieland than on Gritain since Pieland has a higher growth rate. A suitable monetary and fiscal policy will affect the markets of Pieland more than Gritain.