Economics Class Discussions

Camala Ward 

RE: Week 3 Discussion

COLLAPSE

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Hi Professor and Class,

Cost push inflation is an inflation which is an outcome of rise in price of inputs like labor, raw material etc. The increase in price of these factor inputs has adverse effect on supply. The prices of commodity increases causing rise in overall general price level. The various other causes of cost push inflation other than increased cost of production include natural disaster and minimum wage. This type of inflation generally occurs in case of inelastic demand as the demand cannot be easily adjusted according to rising prices. The demand for goods has not changed, the burden of Increased price is passed onto consumers creating cost-push inflation.

e=.20/10% with e=2%

If the company’ s cost of production rises by 10%, then the pressure of Increased cost will be seen in increases price. Price will also rise by 10%.

Price elasticity of demand = (-) percentage change in quantity demanded/ percentage change in price

0.20 = (-) percentage change in quantity demanded/ 10%

Percentage change in quantity demanded = 2%

Here the cost of production rises by 10%, the company can try to pass the additional costs on consumers by increasing the prices for their products. If they do not raise the price, while the production cost increases, the company’s profit will decline.

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Belina Onomake 

RE: Week 3 Discussion

COLLAPSE

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Hello Professor and Classmates,

The scenario I chose for this discussion is the Very Big US Auto company.

Is the demand curve for your product relatively elastic, inelastic or unitary elastic?

The demand curve for my product is relatively elastic since it is greater than 1 with a price elasticity of demand of 1.2 (Froeb, 2018, p. 72). A demand curve that is relatively elastic means “quantity changes more than price” and is therefore “sensitive to price” (Froeb, 2018, 72).

Demonstrate for your company’s product, by how much the quantity demanded will change if you pass on a 10% increase in cost. In other words, show your calculation of the percentage change in the quantity demanded given a 10% change in your price.

Price elasticity focuses on how demand changes when a change in price occurs (Froeb, 2018, p. 72). The formula for price elasticity of demand is:

E = %Δ Quantity demanded ÷ %Δ Price

The “%Δ” means “percentage change in” (Froeb, 2018, p. 72). Therefore, price elasticity of demand equals the percentage change in quantity demanded by the percentage change in price. The price of elasticity of demand and the change in price are already given (i.e. 1.2 and 10%, respectively). Therefore, to find the percentage change in quantity demand, we must multiply the price elasticity of demand and the percentage change in price. The equation will be:

1.2 = %Δ Quantity demanded ÷ 10%

1.2 x 0.1 = 0.12 = 12%

1.2 = 0.12 ÷ 0.1 OR 1.2 = 12% ÷ 10%

The quantity demanded will change by 12% if we pass a 10% increase in cost.

Given your company’s and price elasticity of demand and the industry supply/competitive environment you face prepare a statement for your board as to the potential impact on profits.  Who will pay the larger share of the cost increases, your firm or your customers?

Dear Board of Directors,

Our company, Very Big US Auto, is known as one of the oldest and largest auto manufacturers in our nation. As we all know, we are currently facing some setbacks due to the COVID-19 pandemic. Our main setback involves stoppage in production, which is affecting both the US and Chinese economy. This is a problem since we rely on China to manufacture parts for us to assemble them here in the US. In addition to the production setbacks, we also must take precautions to make sure our employees are safe during this pandemic. Due to everything occurring, demand is relatively elastic with a price elasticity of demand of 1.2. Our decision to pass on a 10% increase in the cost of our products will result in a 12% decrease in the number of our products sold. To maximize profit, customers will pay the larger share of the cost increases.

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