Carlos Cruz Elasticity Scenario Analysis

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Carlos Cruz Elasticity Scenario Analysis
ECO/561

Carlos Cruz Elasticity Scenario Analysis
This paper analyzes the development of a product, supply and demand which has the same evaluating all angles from the viewpoint of an economist with the decision to start a business. Carlos Cruz is an inventor who is trying to create a new product that uses technology to make printed words such as books, materials and convert text into a digital product that people can hear (University Of Phoenix, 2011). This has options or alternatives to their rates in line with the cost of doing business. Carlos must make the important decision whether to incur the costs generated by labor and other labor costs can have the effect of increasing the cost and value of your product or not. The total price of the final product will increase revenues and decrease Carlos by product. Carlos is facing some critical decisions about his invention. He believes he has a viable business, but is not sure how to achieve the maximum total revenue. Carlos has found that some economic principles are present and should not be ignored when launching its product to consumers. Following are some of them.
One principle that is present is the concept of supply and demand. The demand is defined as the quantity of a product that consumers are willing and able to buy based on price over a period of time (McConnell and Brue 2008). The demand shows a relationship if all other things being equal, the higher the price of a good, less people will demand good. Therefore there is a negative relationship between price and quantity demanded. In other words as the price increases, quantity demanded decreases because people do not want to pay the higher price and finds alternatives and substitutes it more later. The determinants of demand affect the purchase are: consumer preferences, the number of consumers in the market, consumer income, price of related goods and consumer expectations about future prices. The offer is the amount of a product that suppliers are willing to provide and make available for sale at a fixed price. (McConnell, 2008).
The law of supply says that as price increases, quantity supplied increases. Therefore, a positive relationship between price and quantity supplied. The underlying determinants of the offer are as follows: the price of resources, technology, taxation, prices of other goods, and the number of sellers in the market among others.
Once these two concepts are clear, it identifies the point where the market equilibrium. Market equilibrium is a condition where the amount of goods or services that are demanded by buyers equals the quantity of goods or services supplied by vendors. Always taking into consideration the above mentioned determinants that may affect the market equilibrium. If consumers are willing to pay high prices, the market will be more competitive and the company began to make different strategies for consumers to fence in that direction. But before that happens Carlos should start with the lowest price on your product always being conscious and drawing a line before launching a price too low and can affect the market permanently. Because some companies have neglected this, other companies have suffered and some have gone out of business. A decrease in the price showed an increase in quantity demanded and potentially an increase in total revenues. A price increase may cause a reduction in quantity demanded and reduce total revenues. Taking into consideration “ceteris paribus” all other variables are constant, or other factors do not transform when the variable of price changes.
Another economic principle is the elasticity of demand. Which is defined as the measure of responsiveness in the quantity demanded of a good, as a result of the change in the price of the same product It is a measure of how consumers react to a change in the price. The elasticity of demand is the percentage change in quantity demanded of a product on the percentage change in price (McConnell, 2008).
Several factors influence the varying degrees of elasticity of a good. For example, if consumer needs are high priced products, luxury goods this is defined as elastic demand. If instead the consumer is indifferent to changes in prices of items such as food, medicines, gasoline and other staples it is defined as inelastic demand. No matter the price the consumer is going to acquire.
Estimate the elasticity of demand
The Price elasticity will help Carlos with his decision to calculate a projected estimate in his business. Price Elasticity can calculate the change in price and quantity to create good forecast.
The cost of a digital book is $10 dollars and he had a demand of 1000. For the newest digital books have a price of $15 dollars and he had a demand of 2000. Using the Price Elasticity theory, we can estimate the increase or decrease in price. Using a simple formula is going to calculate the elasticity of demand. assuming he decide to raise the price of the old digital book up to$15 dollars, this will be its estimated calculation, and let also assume that there is an increase in demand of 100%; Let, Po = Initial Price is while P1 = New Price. This shows that there is a 33% increase in price. In another example saying that Qo = Initial Quantity is 1000? ?  Q1 = New Quantity is 2000 this means that we are going to suppose a raise in sales of old digital books. Consider the following formula;

Qi = 2000 ? ? Qo = 1000? ?  ? ? ? Pi = 15? ?  Po = 10 ? ? ? 
Qi- Qo? ? ?  2000 ??“ 1000 ? ? ? ? 1000 ? ? ? ? ? 1000? ? ?  ? 1500 ? ? ? ? ? ? ? ? 
Qi+Qo ? ? ? 2000 + 1000? ? ? ?  3000? ? ? ? ?  1500 ? ? ? ? 1000 ? ? ? ? ? ? ? 1.5 X 2.5 = 3.75 Price Elasticity ? ? 
? ?  ?  2? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?  2? ? ? ? ? ? ? ?  ? ? 2? ? ? ? ?  ? ? 2? ? 
? ? ?  ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? is positive. Price ? ? ? ? ? ? ? 
P1 ??“P0? ? ? ? ? ? ?  15 ??“ 10 ? ? ? ? ? ? ? ? ? ? ? 5 ? ? ? ? ? ? ? ? ? 5 ? ? ? ?  ? ? 12.5? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?  change is highly? 
P1 +P0? ? ? ? ? ? ?  15 +10 ? ? ? ? ? ? ? ? ? ? ? 25 ? ? ? ? ? ? ? ? 12 .5? ? ? ? ? ? ?  5 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? recommended.
? ? ?  2? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?  2? ? ?  ? ? ? ? ? ? ? ? ? 2 2

When a price in the Arc Elasticity revealed is more than 1 the elasticity is unitary and is recommended to raise the price of the product to increase the sales.
Looking this situation from another angle, if the Arc Elasticity shows less than 1 then the price increase is not recommended. Let see an example that the price increases but the demand shows the same sales amount;
Qo = 1000?  Q1= 1000? ? ? ?  P1=15 P0 = ? 10? 

? Qi- Qo? ? ?  1000 ??“ 1000? ? ? ?  ? ? ? 0? ? ? ?  ? ? ? ? ? ? ? 0?  ? ? ? ? ? ? 1000
Qi+Qo ? ? ? 1000 + 1000? ? ? ?  2000? ? ? ? ?  1000? ? ? ?  ? ? ? 0? ? ? ? ? ? ?  0 X 2.5 = 0 ? ? Price Elasticity ? ? 
? ? ?  2? ? ? ? ? ? ? ? ? ? ? ? ? ?  ? ?  2? ? ? ? ? ? ? ?  ? ? ? ? ? 2? ? ? ? ? ? ? ? ? ? ? 2? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?  ? ? ? ? ? ? ? is zero. Price change? ? ? ? ? 
is not recommended.
P1 ??“P0? ? ? ? ? ? ?  15 ??“10 ? ? ? ? ? ? ? ? ? ? ? ? 5 ? ? ? ? ? ? ? ? ?  5 ? ? ? ? ? ? 12.5 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 
P1 +P0? ? ? ? ? ? ?  15 +10?  ? ? ? ? ? ? ? ? ? ? 25 ? ? ? ? ? ? ? ? 12 5? ? ? ? ? ? ?  5
?  ? ?  2? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?  2? ? ? ? ? ? ? ? ? ? ? ?  2 2

Conclusion
In conclusion Carlos may experience different determinant factors in order to form a product pricing strategy. To analyze the elasticity of price of arc above, the variation of the price of a product shows that the sales or demand for the market will be that determines if the change in price is possible. In general, if the demand is high the change or the increase in the price it??™s recommended as well, as oil and the sub products in the Middle East. But if demand is low the price of the product should maintain or decrease to create an increased demand as well as when buying “one and take one” in a department store and this has been the basic secret strategy of price of most companies. Carlos can test both the increase in price and gain more demand decreasing its price strategy will be to establish his business.

References
Campbell R. McConnell, Stanley L. Brue (2008), Economics: Principles, Problems, and Policies, New York: McGraw Hill/Irwin
Carlos Cruz??™s Price Elasticity Scenario. University of Phoenix, 2011, ECO/561, course materials.
http://www.investopedia.com/university/economics/economics3.asp
Investopedia. (n.d.). Economia Basica: Suplido y Demanda. Obtained on august 23 of 2011
McConnell, C. R., & Brue, C. (2008). Economics: Principles, Problems, and
Policiesed. [University of Phoenix Custom Edition e-text]. The
McGraw-Hill.

Grading Guide: Week Two

Content60 Percent | Points Available5 | Points Earnedx/5 | Additional Comments: |
The paper performs the following functions: * Explains the effect on revenue of a change in price (assuming competitors do not follow). * Estimates the elasticity of demand in the scenario using either the arc method of elasticity or the number and closeness of substitutes (including foreign substitutes). * Explains the relationship between the laws of supply and demand and equilibrium price and quantity. * Accurately justifies estimate of the elasticity. * Provides an appropriate recommendation for business decision. * | | | ?  |
Organization / Development20 Percent | Points Available1.5 | Points Earnedx/1.5 | Additional Comments: |
* Report is no more than 1050 words in length. * Report provides sufficient background on the topic and previews major points. * Report is logical, flows well, and reviews the major points. | | | ?  |
Mechanics 20 Percent | Points Available1.5 | Points Earnedx/1.5 | Additional Comments: |
* Formatting or layout and graphics are pleasing to the eye (font, colors, spacing). * Rules of grammar, usage, and punctuation are followed, and spelling is correct. * APA guidelines are followed. | | | ?  |
| Total Available8 | Total Earnedx/8 | |


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