Managerial Economics

Suzuki Motor Company

1. Suzuki Motor Co. has been remarkable when it comes to the sales of the Samurai model in the American market. However, in June 1988, the Consumers Union damned the Samurai model as being unfair. This is since the company tends to use unfair cost measures to get on top in instances of financial crises. Hence sell its model at higher prices leading to more revenue. This negative report and promotion strategy by the union in the press led to a drop in the number of Samurai models that are purchased by 70.6% to May the same year.

The officials of the Suzuki Motor Company aimed to elevate its sales using strategic price changes. Hence in July, the Samurai model of the Suzuki Company came up with price cuts in the form of dealer incentives that amounted to $2000 from $7995. This led to the company’s sale in the model to grow drastically to a sum of 12,208 in August. The price of the Samurai model hence was being made at a price that added confidence to the consumer.

Source: Economics (n.d.)

3. In calculaion of the price elasticity of demand for a change in the price from $7995 to $2000. There would be a 25% change in the price. The sale of the Samurai model increases from 2199 to 6327 in July; however the 4128 divided by 2199 gives 1.877.Our elasticity evaluation is hence 1.877 divided by 0.25, which is the same as 7.508. This does not make sense.

The problem is that elasticity varies continuously along the demand curve. This is acquired by coming up with the formula more. The percentage difference in quantity demanded is DQ/Q, at the same time the percentage difference in price is DP/P. hence elasticity is [(DQ/Q)/ (DP/P)].

The DQ/DP is the inverse of the slope. Since the curve is linear, the slope is the same. Hence as we go along the curve it remains the same.  The slope hence is -1.45 (=5995/-4128).

However at P = $2000, the P/Q ratio is 2000/6327= 0.3161 while at P = $ 7995, the P/Q ratio is 7995/ 2199 = 3.636. Of consideration is that the P/Q ratio increases in size as one move up on the left side of the demand curve (Economics, n.d.). Hence, the elasticity of demand improves as one goes to the left on the demand curve. It is due to this that the elasticity over the range of demand curve varies in relation to the point it started.

The midpoint method averages the prices and quantities needed, hence getting to an average elasticity estimate for the range of figures used in the demand curve. In the case, the average price is 4997.5 while the average number of vehicles is 4263. The elasticity is the reverse of the slope times the mean cost divided by the mean of the vehicles. That is 0.69 * (4997.5/4263) = 0.81.

4. From an economic perspective, the non-price and price mechanisms applied by the Suzuki make sense. The non-price strategy of rolling over when it faced sudden turns makes perfect sense. The rollover strategy makes the assumption that the investor in this case Suzuki Company chooses a term and later renews it at a certain period of time at the same rate, for a period of time; the higher the premium, the higher the relative rate of return that Suzuki will be able to acquire in the stated period (McDough, n.d.). A good example is in the chart below which shows the average period being assessed, the rate of return in a five year period would gradually increase that of a company that decided to maintain a short term strategy. Averagely, the five-year strategy brought about much better outcome 71% of the time, bringing about an average premium pick up of 97 points. This brings to meaning that there is an increase of investment income reaching over 30%.

Source : McDough, M. (n.d.)

The premium is bound to be affected as time goes by economic and financial market conditions. For instance in the 60s, the markets were attributed to poor inflation a stable interest stability which varied in relation to the 70s. The five year strategy with regard to the roll over strategy brought about higher premium. With the economic focus that upholds a stable economic advancement with moderate inflation. This would mean that investors or companies like Suzuki may go on to expect premium pickup with a five year strategy in comparison to the rollover strategy for the purpose of acquiring a balance.

Mobile Phone Company

1. With regard to the product that is being looked at by the supply and demand, technology may do away with demand. It a product is taken out since technology has brought about an effective substitute product that undertakes the same duty but at a cheaper price, demand will quickly increase as the buyers will be able and easily to acquire these good. This decreases the equilibrium price to points where the supplier is not able to acquire profit from the supply of the product.

Another most notable and known impact of technological change is ability to elevate production. Advancement in supply means that the supply is able to create products at a lower price. This lowers the price unless the demand of the supply is high.

Technology may result to an easy entry by other firms, or make it much more appealing to other suppliers. With the entry of more suppliers to the market, this results to the increase in supply, as the good are readily available. These may result to a decrease in prices as the products are easy to come by. The buyers will hence get to acquire more of the goods easily leading to an increase in demand.

2. Consumer surplus is the difference between the highest price that clients are willing to pay for the product and the market price that they are able to pay for a product. With regard to the mobile phone industry, the sending of the messages in the earlier point in time involve human labor to send the messages hence brought about high costs in sending the messages. There were hence a limited number of people who are willing and able to send message (Riley, 2006). With the change in technology, the consumers were able to send messages easily and cheaply leading to a higher number of people sending messages. This has additionally been caused by cheaper costs.

On the other hand, producer surplus is the difference between what the suppliers are willing and able to supply a product for and price they acquire. Before the advancement of technology, suppliers would only use telegrams to send messages to people that are far and wide. This was too costly and limited to certain time periods. However with the advancement of technology aspects of mobile phone it has brought about easy supply of services to clients in an effortless manner hence the limited costs as not much is applied in offering the service for instance labor.

3. Prior to the technological advancement in the mobile phone industry, the prices were higher as it involved human labor. It hence meant that not everybody is able to acquire and use the service. However, with the advancement of technology, each and every person has been able to acquire the service leading to cheaper services. Mobile phone owners have hence been involved in price wars in attempt to capture the clients by cutting the cost.

Reference

Riley, G (2006). Consumer & Producer Surplus. Retrieved from:        http://www.tutor2u.net/economics/revision-notes/a2-micro-consumer-producer-     surplus.html

Economics (n.d.). Price Elasticity of Demand. Retrieved from:             http://economics.illinoisstate.edu/ntskaggs/readings/elasticity.shtml

McDough, M. (n.d.). Term Selection for Investors: The Winning Strategy. Retrieved from:             http://www.finpipe.com/strategy/mmterm.htm