Managerial Economics
Hypothetical Business Model
Group members
FAHAD ALI MIRZA 121103FAIZA RIAZ 121107
FAROOQ HAIDER 103119
Purpose Statement
Managers make effective business decisionsLearning the field of managerial economics (market structure, pricing strategy and competition ).
Problem statement
Problem statement
Gourmet chocolate
Market Conditions of Chocolate Industry
Hilal B.P sweets Cadbury’s Kidco Mayfair Mitchells Sweet Hills
SWOT ANALYSIS
Strength
Weakness
Opportunities
Threats
Strong Demand
Levels of Flavor
Preferred in Children
All firms are able to enter and Exit
Non Branded Substitute
Market Power everyone Holding
Hot temperature Melting
Free entry & exit
Taste change
Chocolate Variety
Richer Chocolate
Industrial Conditions
Health Conditions
Market Structure:
Monopolistic competition.Produce differentiated products.Freedom of entry and exist.
Available substitute
PerkJubileeDairy milkKit KatSnickersBountyMars
Price Comparison
GOURMET chocolate
Dairy milk chocolate
Price Rs. 15 Rs. 17Weight 10 grams 10 grams
Flavor ComparisonGOURMET chocolate Cadbury Dairy milk
chocolateMilky chocolateDark chocolateWhite chocolateWafer chocolatePeanut chocolateAlmond chocolateTreat chocolateMint chocolateCrackers chocolate
PeanutsRaisinsWhite ChocolateBourneville (original)Bourneville AlmondCrunchy (original)Crunchy RocksDairy Milk HazelnutBlackcurrant & Vanilla
Impact of elasticity!!!
If demand function is;
Q = 40 – 2P
E = -2(15/10).
E = -3
3> 1 in absolute terms
This shows that the demand of GOURMET chocolate is highly elastic.
Cost for the maintenance of Labor and Equipment
Cost of Labor (variable)
Cost of equipment (fixed)
Wage rate per day = Rs.333
Wage per labor each month = Rs.10, 000
No. of labor units employed = 16
Total cost of labor per month =
Rs. 160,000
Sales per month
Questions???
Question # 1
At what price Gourmet chocolate should be sold to maximize profit?
Answer!!!Where MC = MRDemand functionQ = 40 – 2P Cost functionC (Q) = 4 +0.1 Q2
TR=P*Q
TR=(20-1/2Q)Q
TR=20Q-1/2Q2
MR=20-Q
MC=Q
MC = MRQ = 20 – QQ = 10 gmsP = Rs. 15At price of Rs.15 Gourmet can maximize its profit.
Question # 2
How does the cost of Dairy milk chocolate affect sale of Gourmet chocolate?
Answer!!!
We can use Cross price elasticity in order to know the effect of prices of Dairy milk chocolate on the Gourmet chocolate demand i.e. E = %∆ Gourmet / %∆ P CadburyWhere; E = 310% increase in price of Cadbury milk chocolate causes the increase in quantity demanded of Gourmet chocolate to 30%.
Question # 3
If a severe snow storm raises the price of coca beans, should the Gourmet sell chocolate and if so, at what price?
Answer!!!
Price and cost Result
P > ATC Profit maximization
ATC > P > AVC Loss minimization
P < AVC Shutdown point
cont
• C(Q)=4+1.5Q2
• Q=40-2P
• 2P=40-Q
• P=20-0.5Q
•
• R=P*Q
• R=[20-0.5Q]Q
• R=20Q-0.5Q2
cont• MR=20-Q• • MR=MC• 20-Q=3Q• 4Q=20• Q=5• • P=20-0.5(Q)• P=20-0.5(5)• P=20-2.5
cont• P=17.5
• Profit=R-C
• Profit=PQ-C
• Profit=[1705*5]-[4*1.5(5)2]
• Profit=87.5-41.5
• Profit=46
• Variable cost=Total cost-Fixed Cost
• =41.5-20
• =21.5
cont
• AVC= VC/Q
• =21.5/5
• =4.3 per unit
Example Cost before flood C1 = Rs. 14 (according to the given cost function: C = 4 + 0.1Q2)Cost after flood C2 = Rs. 154 (according to the new cost function: C = 4 + 1.5Q2)The existing price is Rs.15 The existing revenues are 15 * 10 = Rs.150New MC = 3QMR = 16 – QWhen MC = MR3Q = 16 – Q4Q = 16Q = 16 / 4Q = 4 gmsP = 20 – 1/2 (4)P = Rs. 18This shows that the price will increase Rs.3 more than the previous one.Now the revenues are (18 * 4) = Rs.72
Question # 4
Can the Gourmet remain competitive if an overseas chocolate producer pays 30 percent more for cocoa beans but pays 20 percent less for labor?
cont
• New entry of firm
• NO competitive
Answer!!!
Not be more competitive of Gourmet.
Total variable cost of the overseas company will increase it will result in incase of the price of chocolate
Example
Gourmet chocolate Dairy milk chocolate
Labor cost = Rs. 88Cocoa beans cost = Rs. 100
Labor cost = Rs. 70Cocoa beans cost = Rs. 130
TC = FC +VC
TC = 20 + ( 100+88)
TC = 20 + 188
TC = 208
TC = FC +VCTC = 20 + ( 70+130)TC = 20 + 200TC = 220
Conclusion
• At Rs. 15 per 10 gms of chocolate, GOURMET chocolate should be sold to maximize its profit.
• The cost of cadbury Chocolate affect sale of Gourmet chocolate i.e. 10% increase in Cadbury Chocolate causes to increase in quantity demand of chocolate to 30%