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Structure And Firm Strategy Essay

3532 words - 15 pages

Structure and Firm Strategy
“Six months from today I have decided to start my own online service selling cookbooks. Presently, I am working full time with an annual salary of fifty thousand dollars a year. At the time of startup for selling the cookbook I will have made twenty five thousand dollars in the first six months of the year. The twenty five thousand dollars that I give up by moving on to my internet business of selling cookbooks is a nonmonetary opportunity cost. “The opportunity cost of any activity is the highest-valued alternative that must be given up to engage in that activity” (Hubbard pg. 356; 2012). This trade off of not gaining my twenty five thousand for working the ...view middle of the document...

Therefore, Q sold at $20 = 10,000; Q sold at $30 = 25,000; Q sold at $35 = 22,500. Plotting these figures on a graph will show us the demand curve for the difference in each price charged for the cookbooks. (See Appendix A)
As you can see in the graph the demand curve is at a downward slope. This happens for a few reasons. One, is the change is in price, as the price lowers more of the cookbooks are demanded. The change in price causes the consumer to substitute a cheaper product in place of another. Also, when there are more cookbooks for consumers to choose from they switch causing a substitution effect. Two, as the price of the cookbook decreases it becomes cheaper for the consumer giving them the ability to buy more of the cookbooks because their buying power increases; also known as the income effect. Three, the higher price of the cookbook at $35 (the highest price) will result in fewer consumers purchasing the cookbook until the price falls giving way to more consumers being able to afford the cookbook. Therefore, when the price of the cookbooks decreases more consumers enter the market to buy the product. Consequently, this also causes a rise in market demand and the downward slope of the demand curve. With the shift in income and the amount of consumers purchasing the product the cookbook is considered a normal good. “A good is a normal good when demand increases following a rise in income and decreases following a fall in income” (Hubbard, pg. 73).
The elasticity of the cookbooks changes with the responsiveness of consumers per price. The elasticity can be inelastic or elastic.” The formula for Elasticity of demand is E (D) = % change in quantity demanded / % change in price” (Weisenseel, 2013) When figuring the elasticity of my demand curve for the cookbooks, I find that the mid-point of elasticity between Q1 (30,000) to Q2 (25,000) is 0.4 and the elasticity from Q2 and Q3 is .68. Since the difference is so large between the two and the downward slope is constant the elasticity is constantly changing. In other words, as the price rises from $20 to $35 the demand for the cookbook increases in elasticity. The best way to determine elasticity of the cookbooks in the example given is figuring the total revenue from the changes in the demand curve. Since there is an increase in price and a decrease in quantity and the revenue is rising the cookbooks are inelastic with the example given. Buying cookbooks in this way has a lot to do with how the consumer reacts to the price changes. Also, more and more books are being produced online giving way to hard copy production experiencing a decrease in demand. The online business is worth pursing at selling the cookbooks for $30.00 which is the highest demand with the most revenue. This can also be seen with the fixed cost being $41,000 and the total revenue being $750,000 the profit is $709,000 if the entire amount is demanded and can be sold. On the same token, the online business can be...

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