Prices are the driving force behind every buying and selling decision in a market economy. Prices are determined by the supply and demand equilibrium and are influenced by the price elasticity of demand and supply of goods and services.
For this discussion, first play the simulation game Competitive Markets in the MindTap environment. Then, you will share your experiences playing that game. Your work in this discussion will directly support your success on the course project.
In your initial post, include the image of your simulation report in your response. Then, address the following questions:
Based on the outcome of the simulation, was the sale price you set the same as the equilibrium price? Refer to the supply and demand model to explain why they might be different.
Imagine that you own your own business. How would price elasticity of demand impact the pricing decisions of your business?
What are the determinants of price elasticity of demand? Identify at least three examples.
In your responses, comment on at least two posts from your peers and share an example of a company that experienced a change in revenue as the result of a change in the price of the good or service they provided. After reading your peers’ posts, explain which determinants of price elasticity of demand could be the cause of the change in demand.
Emily Hope posted May 18, 2022 2:01 PM
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Hi Class,
The sale price that I set wasn’t the same as the equilibrium price. The pricing was different because I want to be able to produce a smaller quantity with a higher selling price. I am okay with having a smaller clientele because my item is more on a high-end range so I can still make a similar profit as I would if I made the item cheaper and produced more. At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. The equilibrium price is sometimes called the market-clearing price because, at this price, everyone in the market has been satisfied: Buyers have bought all they want to buy, and sellers have sold all they want to sell. On the supply and demand model for my business, it would show a smaller demand and supply because I would be producing a smaller amount based off of the demand I have for the cost of the item(s).
If I owned my own business, price elasticity of demand would impact the pricing decisions of my business constantly with the fluctuation of economic, social, and psychological forces that shape consumer preferences. This is because price elasticity of demand is “a measure of how much the quantity demanded of a good responds to a change in the price of that good (Mankiw, N. G. 2021)”. I would need to constantly be monitoring the market, supply, and demand to make sure that I’m not over or under charging for the items that I sell. I also need to make sure to monitor other competitors to understand what they are charging.
Some of the determinants of price elasticity of demand are Availability of Close Substitutes. “A good with close substitutes tends to have more elastic demand because it is easier for consumers to switch from that good to others. (Mankiw, N. G. 2021).” An example of this is milk. Another determinant is Necessities versus Luxuries. Necessities tend to have inelastic demands, whereas luxuries have elastic demands. “Whether a good is a necessity or a luxury depends not on the good’s intrinsic properties but on the buyer’s preferences. (Mankiw, N. G. 2021).” Example of this is a designer hand bag opposed to a hand bag from Walmart. Another determinant is Time Horizon. A great example of this is the current gas issue in the US. When gas prices rise, the demand usually falls slowly overtime. People do need this necessity but over time you will see people purchasing Tesla’s (for example) to save on gas or they may look at using car shares.
References:
Mankiw, N. G. (2021). Principles of economics (9th ed.). Cengage Learning.
Brianne Forrest posted May 18, 2022 4:28 PM
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Hi Everyone,
I am still trying to figure out how to do the simulations. In order to be able to sell a smaller quantity and make a profit I had to sell my product for more. My equilibrium price and my sale price were not the same. Items can not be sold at market prices by a company if you want to make profit off of it. To determine your sale price you have to look at how much it cost to produce a product and how high the demand is for it. In smaller communities the demand is not going to be as great as it would be in larger communities. Owning my own business means that price elasticity depends on the demand of the product, how much production will cost and any other cost that I may have. Other cost would be such as having the materials shipped to me and being able to compete with other businesses and their prices. The market and my competitors are also part of the cost. If the market goes up then so can my business but if the market plummets then my business will as well because I will not be able to afford to produce my product. My competitors also play a huge role in the cost of my product. I have to play it safe enough for the community to buy my products but also have to be able to make a decent profit. I agree that I will not always make a profit. Just like any other business I will have my days where I will have a lose.
The simulations if I did them correctly showed me that the more I sell my product for the more profit I will make but that is not always the case. I have to watch what others are selling the same product for because people can be selling it for a penny cheaper and the people will buy from my competitors. You can price your product for a certain price but you have to have a little leeway in order to be able to sell. You have to be able to play with your prices and still be able to make enough profit to stay in business and beat out your competitors.