Price elasticity measures the responsiveness of the quantity demanded or supplied for a given good to change in its price. It measures the impact of change in any of the variety of factors which include the price of a product. To calculate the demand elasticity, the percentage of change in the quantity in demand is divided by the percentage of change in the economic variable. By measuring the price elasticity of demand, the percentage of change in the quantity in demand is divided by the percentage of the price change.
Price elasticity Vs. Price inelasticity
For Price elasticity, a change in prices results in a bigger percentage in demand. An example in price elasticity is that of an increase in the prices of burgers in fast food. In such a case, consumers will be forced to opt for other products or companies offering relatively cheaper process, hence reducing the demand. Price inelasticity on the other hand occurs when a change in pricing leads to a small percentage change in the demand (de Rassenfosse, 2018). An example is the case of Apple products such as iPhones or IPads. Apple is a strong brand hence when the company increases its process for the commodities, consumers still go ahead to pay for premium for the same products. Many people continue to buy because it is a luxurious product, where Apple is also a well-known brand.
Marginal analysis is very vital in marginal economics since it helps in making managerial decisions. It helps in predicting and measuring the impact per unit changes of a firm’s goals, where it ultimately identifies the optimal resource allocation given the constraints in a business. In the marginal analysis, when the marginal benefits exceed the marginal costs, it is vital to increase the activity to reach the highest net benefit (Ray & Gramlich, 2016). This may include changing the pricing as a way of ensuring that the maximum profit needed by the company is attained. Similarly, when, marginal costs get higher than the marginal benefits, the activity is decreased, hence enabling the manager to make better pricing decisions. Sunken, fixed and average costs do not affect the marginal analysis, and hence are irrelevant in the optimal decision making. Marginal analysis is only applicable in instances where a firm hires new personnel or there are additional products, hence helping to make the most suitable pricing decisions, which are crucial for the attainment of maximum profit margins for a firm.
Importance of Opportunity Costs to Decision-Making
Opportunity costs apply to various aspects of life decisions, more so concerning money related matters. Opportunity cost is a macroeconomic term, which relates to resource scarcity, meaning that people have to make decisions on how to use what they already have. Since decisions involve making one choice, one can only have the benefits of open options and have to forego the benefits of the other (Danzon, Drummond, Towse, & Pauly, 2018). An example is when one decides to spend money on vacation, and delay remodeling of their house, then the opportunity costs are the benefits of living in a renovated house. In business, opportunity costs also play a huge role in decision-making processes. If a person decides to buy a new piece of equipment, then the opportunity costs entail the money spent elsewhere. Firms, therefore need to take both explicit and implicit costs into account in the vent of making rational business decisions.
Opportunity costs hence leads to trade where there are three key aspects involved including money, time, and the efforts made. There are key financial considerations to weigh, where the key question to ask before making an opportunity cost decisions is what other alternatives the money that is getting spent on a single decision would be sued for. Companies, therefore, should consider the opportunity costs in trade-in to decide on the best trade idea to make, intending to maximize the sale and likely profits. Time, in the opportunity cost realm, is more priceless than cash. Therefore, when making a decision, businesses need to factor in the time needed or saved, when settling for a given opportunity.
Benefits of Better Business Decisions
Making better business decisions has an impact on a number of parties, which range from the producers, consumers, and society as a whole. First, a great decision means that the business has factored in the needs of its consumers, hence produces quality products that meet their needs and expectations. Great business decisions also consider factors such as the environment, the needs of the society, and the welling of every individual hence leading to overall benefits to its stakeholders. The business decision should factor in both consequentialism and deontological ethics in its decision-making process. For Deontological ethics, the activities undertaken have to follow the required moral obligations, while for the consequentialism the consequences of action have to be focused in the course of the decision making processes.
Many aspects have to be factored in the decision process of a business. First, is the Price elasticity and inelasticity, which analyze the demand for a given product or service. Marginal analysis is another aspect that businesses ought to consider, more so in the course of making pricing decisions. Opportunity costs are also a critical aspect of business that can help in making good decisions that will impact on a business positively.
Danzon, P. M., Drummond, M. F., Towse, A., & Pauly, M. V. (2018). Objectives, budgets, thresholds, and opportunity costs—a health economics approach: an ISPOR Special Task Force report . Value in Health, 21(2), 140-145.
de Rassenfosse, G. (2018). On the price elasticity of demand for trademarks. Available at SSRN 2628646.
Ray, K., & Gramlich, J. (2016). Reconciling full-cost and marginal-cost pricing. Journal of Management Accounting Research, 28(1), 27-37.
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