Economics and Quantitative Analysis Business Models

Question: Describe about the Economics and Quantitative Analysis for Business Models. Answer: 1. What is the midpoint method for calculating price elasticity of demand? Midpoint strategy refers to a model which is used to calculate the price elasticity of demand for various types of goods and services through estimation of the mean elasticity for specific changes in two components. Therefore, this means that for the model or the method to be applicable, we must have two known points on a particular demand curve. To determine the price elasticity of demand (PED) using the midpoint technique, we have to divide the change in the price of the product with the average price. (Gans, Stonecash, Robin, 2014, p. 99). The resultant figure from the computation is then multiplied by 100%. How else can price elasticity of demand be calculated? The price elasticity of demand (PED) of a product can also be calculated using either the initial or final values of quantity (X and Y) and price. Additionally, the price elasticity of demand can also be calculated using other techniques, for example, total expenditure technique and percentage method. Under total expenditure method, PED is determined based on the total amount spent by customers on a particular commodity. Total expenditure before the price is compared to overall expenditure after price change to ascertain whether there's an increase or decrease. Under percentage method, PED is determined by comparing proportionate or percentage change in product demand with the proportionate change in the product's price. (Agarwal, 2016, par 1-9). What is the advantage of the midpoint formula? One of the main advantages of this technique is that it always provide the same result regardless of the position which one is taking i.e. either from lower to the high place or vice versa. 2. What are the key determinants of the price elasticity of demand for a product? What determinant is the most important? Presence of Substitutes If a product has a variety of close substitutes, for instance, fast foods, then individuals have a tendency to respond unequivocally to a price increment of one company's fast food. Along these lines, the PED of this company's commodity is high. Proportion which the Product Occupies in the Consumer's Budget Commodities which occupy a huge segment of the buyer's financial plan have a tendency to have more prominent elasticity. The increase in price of such goods will make customers focus on substitutes. Conversely, consumer demand is likely to be inelastic when a product occupies just insignificant portion of the buyer's budget. The Degree or Intensity of the Necessity The more the necessity for a commodity, the lower the product's elasticity. Customers tend to purchase key items (for example basic prescriptions like insulin) paying little attention to the price. Luxurious items, then again, have a tendency to have more elasticity. The Cost of Production When the price of product increases, suppliers tend to increase their supply to counter the excess demand. Increasing the supply quantity will depend on various factors such the level at which the organization is currently operating. In case the business is currently under full capacity, then the management will have to source for extra machines and labor. This expense may prevent the company from increasing the supply. What determinant is the most important? The most crucial determinant is the availability of substitutes. Clients are likely to move from one item to another even with the smallest increase in the price of a particular product due to the availability of alternative item which can serve the same purpose. (Mankiw, 2016, p. 96). If there are no substitutes, the demand for a particular item will consequently be inelastic implying that any increase in its price leads to no impact on its demand. References Agarwal K. 2016. Measuring Price Elasticity of Demand (4 Methods). [Online]. Available at: https://www.yourarticlelibrary.com/economics/elasticity-as-demand/measuring-price-elasticity-of-demand-4-methods/46804/. [Accessed 1 December 2016]. Gans, J. K., Stonecash S., Robin; B. Y. F. 2014.Principles of economics with student resource access 12 months. New York, Cengage Learning. https://public.eblib.com/choice/publicfullrecord.aspx?p=2164808. Mankiw, N. G. (2016).Business Economics. Cengage Learning. https://www.myilibrary.com?id=911616