You are the new owner of Vanda-Laye Corporation. You are interested in your company’s cost and revenue relationships as well as its future pricing strategies.? Tasks:

Elasticity Concept.html

Elasticity Concept

“A measure of responsiveness used in demand analysis is elasticity.  The concept of elasticity simply involves the percentage change in one variable associated with a given percentage change in another variable. Elasticities are often used in demand analysis to measure the effects of changes in demand-determining variables. The elasticity concept is also used in production and cost analysis to evaluate the effect of changes in input on output, and the effect of output changes on costs. In finance, elasticity is used to measure operating leverage “(Hirschey, 2009, 170).

“Factors such as price, product quality, and advertising that are within the control of the firm are endogenous variables. Factors outside the control of the firm, such as consumer incomes, competitor prices, and the weather, are exogenous variables. Both types of influences are important. For example, a firm must understand the effects of changes in both prices and consumer incomes to determine the price cut necessary to offset the decline in sales caused by a business recession. Similarly, the sensitivity of demand to change in advertising must be quantified If the firm is to respond appropriately to increase in competitor advertising” (Hirschey, 2009, 170).

Reference:

Hirschey, M. (2009). Fundamentals of managerial economics, (9th ed.). Boston, MA: Cengage Learning.

“The price elasticity of demand measures the responsiveness of quantity demanded to changes in the price of the product itself. With elastic demand, a price increase will lower total revenue and a decrease in price will raise total revenue. With unitary elasticity the effect of a price change is exactly offset by the effect of a change in quantity demanded and total revenue is constant” (Hirschey, 2009, 185).

CVP Analysis.html

CVP Analysis

Management can use CVP analysis in many areas. This analysis is referred to as break-even analysis because it tells managers much more in addition to determining the break-even point of an operation. The CVP analysis tells management a great deal of information including the relationships between the revenues, costs, and profits of a company. It is especially useful to management when determining what the cost structure of the company should be in the long term (or the planning period).

A basic CVP model shows fixed costs at a certain level, with variable costs increasing at a given rate as the output increases. In addition to breakeven points, a CVP analysis helps management determine the effects of a change in the price on the revenues, given a cost structure or a proposed change in the cost structure of the company. The management can also apply a CVP analysis to determine the amount of operating leverage it decides to employ. The operating leverage refers to the amount of fixed costs a company decides to use in its operations, relative to variable inputs.

As a manager, when you are making decisions for the company, you need to consider the distinction between how the decisions will impact the company in the short term and in the long term. You can classify the company’s operations as short term or long term.

Utility Theory.html

Utility Theory

Economists use utility theory to study consumer behavior in an effort to explain why consumers will purchase more of a company’s goods only if the prices are lowered. In other words, basic utility theory explains that as you consume increasing amounts of a product, you receive decreasing utility from each additional unit consumed and must be motivated to consume even more of the product. This concept is called the law of diminishing marginal returns. For this reason, a company has to convince potential buyers that they will gain utility from buying more of its product.

“Substitutes are goods and services that can be used to fill a similar need or desire.  Goods and services that become more desirable when consumed together are called complements. Going to the movies and renting a DVD are close substitutes. At the same time, many consumers like to consume buttered popcorn and soda at the movie theater. Movies, buttered popcorn, and soda are often complements” (Hirschey, 2009, 156).

“Insight into the indifference curve concept can be gained by considering what indifference curves look like for the logical extremes of perfect substitutes and perfect complements. Perfect substitutes are goods and services that satisfy the same need or desire. Perfect complements are goods and services consumed together in the same combination” (Hirschey, 2009, 156).

Reference:

Hirschey, M. (2009). Fundamentals of managerial economics, (9th ed.). Boston, MA: Cengage Learning.

Economists use indifference maps to explain consumer buying habits in terms of the concept of utility. It is important to remember that budget is a constraint for most consumers, forcing them to select different combinations of the goods in question in order to reach the highest level of satisfaction, resulting in the highest indifference curve.