Economic concepts and applications

Economics

Explain how an understanding of elasticity can help business owners determine the most profitable prices to set for their products.

The concept of elasticity is crucial in the setting of the adequate retail price. On the one hand, the retail price for the sold product or service needs to reflect the totality of the costs incurred in the delivery of the respective item, as well as the profit of the business owner. On the other hand -- from the standpoint of the consumer that is -- the retail price needs to be affordable and competitive. The elasticity helps the business owner find the relationship and the equilibrium between the two. For instance, when a business owner increases his profit margin, the retail price will increase and the customers' purchase power will decrease. The elasticity will as such tell the business owner to lower his profit margin.

Explain the income effect and how it is related to the Law of Demand.

The income effect refers to the change in an individual's, a group or even a country's economy and wealth. The income effect is a useful economic concept as it offers insight into the law of demand. More specifically, the income effect is in direct relationship with the level of demand. In other words, as the income of an individual or country increases, the demand for products and services revealed by the respective individual or country increases as well (Investopedia, 2010).

3. A farmer purchases a new type of seed corn that will reduce her need for pesticides by two-thirds. The new seed is only slightly more expansive than the type she has planted in the past. What effect might this new technology have on her production? Explain.

The corn production of the farmer would be expected to increase due to the following:

The price of the new seed is insignificantly higher than the price of the old seed

The farmer would register significant savings from the cut of two thirds of the fertilizer necessity

As a result, the value of the savings is higher relative to the value of the investment made with the new seed

The farmer could use the savings to increase the production by cultivating on new land

If on the other hand, the farmer chooses to not reinvest the savings, the production would be expected to maintain its current levels.

4. Jon opens a video-rental store. What factors should he consider in making his decision on what hours to operate each day? What hours would you recommend? Why?

The rule is that every business is different. Jon's video-rental store sells a specific product to a specific customer base; this means that the offer has to be tailored to the needs of the respective market. Elements which should be taken into consideration then include:

The working schedules of the target market

The preferences of the target market in terms of the times they want to watch the movies

The demographics of the target market

A proposed schedule is that of 1 PM opening hours and 12 PM closing hours during the week so that customers can rent their movies on their way from work. During the week-end, the store should be opened in the mornings so that customers can rent their week-end films or the Saturday morning cartoons for the children.

5. How do price ceiling, price floors, deficiency payments, and other artificial controls over price undermine the effectiveness of the price system?

All these elements represent artificial interventions in the price system which eventually mean that the price is no longer set by demand and offer. In other words, the price is artificial and it does not reflect the realities within the market. This could lead to customers' and economic agents' dissatisfactions, but could also be rooted in deeper economic problems, such as inefficient industries which require state subsidies.