Managerial Economics July 2013
* Managerial economics offers managers the collective wisdom of the economics profession. How useful and applicable are the Seven Rules (discussed on the slides during the second lecture)? Specifically, critique/discuss each of the seven rules and apply them to the success of your firm. And more specifically, how would you use the rules to estimate the key variables: Elasticity of demand, markup, MC and MR? Finally, are there other lessons/suggestions from the textbook that you feel are viable, or, perhaps nonsensical?
The Rule #1: Know Your Market
Apple Inc. needs to know their market. If they do not know their market they cannot make good or sound business decisions. Apple needs to know their elasticity of demand for their products and understand if all their goods possess the same elasticity or if some segments within the market allow them to price certain goods at a certain point and others at another. After researching one of Apple Inc. products I was able to determine the costs of the Ipad a defining product for the Apple Inc. According to an article on bloomberg.com, the costs of creating a 16, 32, and 64 gigabyte iPad are $260, $289, and $348 respectively. Their selling point of these three iPads are $499 for the 16 gig, $599 for the 32 gig, and $699 for the 64 gig. Using a formula different than the change of quantity demanded/change in price, the calculated these elasticity’s through the incorporation of marginal revenue and price and concluded that the 16 gig iPad has an elasticity of demand of -2.09, the 32 has a -1.93, and the 64 has a -1.99.
As you examine this data you can find these three products to have a very close elasticity. The items demand is considered relatively elastic. Meaning that if Apple were to change prices from current levels, the percentage change in quantity demanded would exceed the percentage change in price. People may not purchase the items if the price were to change.
The Rule #2: Relationship between Price, Markup and Elasticity
Markup is the reciprocal of the elasticity of demand. Thus, the more inelastic the demand, the greater the markup. The objective of every firm is to reduce the elasticity of demand. However, the question remains on how to decrease the elasticity of Apple Inc. products. There are several factors that weigh into how elasticity the goods are: * Availability of goods: The easier it is to find a substitute, the more likely consumers will find alternatives if Apple increases their prices * Percentage of income: The more the percentage of the product in comparison with the consumer’s total income, the more likely the price increase will affect the decision to buy and change the consumer’s behavior. Electronics and cars are a luxury therefore, consumers may be less will to buy Apple Inc. products if the prices increase as they are a luxury * Necessity: Once again, consumers will reduce demand on non-necessary items. Generally Apple Inc. products provided are unnecessary unless needed for specific profession. * Duration: When consumers have the possibility of delaying their purchases, they will be able to put off a purchase while buying something like gasoline will be done no matter what the price is (basically). This is especially prevalent for Apple, considering they introduce a new product semi-annually and the older version of the product prices dramatically decrease.
Apple Inc. mainly sells these types of products: * Ipod: digital music player * Iphone: smartphone * Ipad: Tablet pc * MacBook: Desktop and laptop computers
Unfortunately for Apple Inc. these products are sold by many other retailers for generally a much cheaper price. Their product is what the average