This study is aimed at considering the demand and supply effect of a particular product on the market of the product over the next few years. This study actually takes into account all the microeconomic and macroeconomic factors that are likely to influence the price and output of that product over the next five years. This study considers the current, retrospective and prospective effects of the market of the product on the product in the coming years. How the price and output of the product is going to get settled in the future for the product. For a satisfactory analysis of the product’s performance in the coming years, both macro and micro- economic analysis have been made.
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For the purpose of this study we have used a product as a guinea pig. In order to understand the impact of the product in its related market and the impact of the market on the product, we have carried out further analysis using the established theories of economics about the future viability of the product. Here for the sake of this analysis we have used the potato chips product manufactured by the Coca Cola Company called LAYS.
Price Elasticity of Demand
The price elasticity of demand is defined as the magnitude of the proportionate change in demand and the proportionate change in price of the product. Therefore, elasticity is the measure of responsiveness.
Price elasticity of demand is a very important concept that is related to the pricing decisions of a product. If an organization wants to generate the maximum amount of revenue from its products and it is unable to determine how much increase in the price can be made by them so that the overall demand of the product does not reduce. This decision is taken on the basis of the analysis of price elasticity of demand.
The price elasticity of demand can be described as the rate of response of quantity demanded due to a price change. This means that if a unit change in the price of the product is made then the quantity demanded will also change up to the extent to which the demand of the product is dependent on the price of the product. In this case, Lays is a product which is highly appreciated product of a very reputable company of the world and has a very large market all over the world. Through the detailed analysis of the product’s features and the price elasticity of demand on this particular product, it has come to the attention that since the product is being sold in the perfectly competitive market, any decisions regarding the product or its feature can affect its current market.
From the application of the concept of price elasticity of demand on this product, we have come to the conclusion that the demand of the product is price elastic. It means that if the price of the product is changed then the demand of the product is also changed. The main feature of the analysis is that the price can be changed up to some extent and a minor change can be absorbed by the current demand of the product whereas a significant rise in the price of the product is seriously going to threaten the market demand of the product.
However, on the other hand, if the price of the product is reduced from its current price level then the demand of the product is likely to increase resulting in the overall increase in the level of sales that can be achieved in the year. But this may not be feasible for the company as the company may lose some profit due to the reduction in the price when the price charged may not be sufficient to cover the costs required to manufacture the product. The price at which the quantity demanded and the quantities supplied are equal is the price that should be charged for the particular product.
In the case of lays we have come to know through our detailed analysis that this particular product is highly price elastic because the demand is significantly going to change after the change in the price of the product. Hence, the product is very sensitive to price changes. One best feature of the price elasticity of demand is the fact that is shows how much an individual consumer is willing to pay at maximum for a product.
Cross Elasticity of Demand
Cross elasticity of demand as defined in the business dictionary is:
Proportionate change in the demand for one item in response to a change in the price of another item. It is ‘positive’ where the two items are mutual substitutes, and any increase in the price of one (say butter) will increase the demand for the other (say margarine). It is ‘negative’ when the items are complementary and any increase in the price of one (say cars) will decrease the demand for the other (say tires). See also elasticity. Also called cross price elasticity.
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Cross elasticity of demand is the effect on the change in the demand or supply of one good as a result of a change in something related to another product. In simpler terms, it means that how much a change in the price of one product will change the sales volume of another product. Here, the studied product, a potato chip, is surviving in the competitive market and the result in the price of other chips or snacks affect the sales of Lays significantly. Therefore, the product is also deemed to get affected by the change in the price of other products that are considered to be its substitutes.
Income elasticity is the concept that relates to the change in income and the effect it has on the demand of the particular product. Income elasticity of demand measures the relationship between the change in the income and the quantity demanded of the product.
Since the product is the consumable product and is a relatively cheap product, therefore it is assessed that the change in the income of an individual consumer is not going to significantly change the demand of the product.
Macroeconomic analysis of the entire economy of the whole markets covering the product has been made and the impacts of the macroeconomic factors on the product are assessed. Macroeconomics take into account all of the factors that are relevant to the decision and policy making of the entire economy and that are dependent on the overall factors affecting the economy not on the individual factors that affect the individuals of the economy.
The first factor that is taken into account is the factor of national income or gross domestic product. As it is widely known that the world is going through the worldwide financial crisis and is recovering from the recession. Governments all over the world are trying their best to recoup from that economic crisis with the help of economic aids and bail out plans supporting the big companies of their countries to get of the insolvency situations. In order to boost the demand of the economy governments all over the world have taken some drastic steps which are dependant mainly on the increase in demand in the local economy. But this worldwide recession is less likely to affect the consumable product like Lays because people are used to eat and they have to eat even if their income is reduced. The question here arises that at what price consumers are willing to purchase the product. This problem is addressed by setting the adequate price for the product that is not going to affect the demand of the product in the economy.
Another macroeconomic problem is the problem of inflation. Inflation means the continuous rise in the prices of products in the economy. Inflation is a major driving force in determining the demand and usage of a product in the economy. If any country is subjected to high inflation rate then that country is less likely to settle the matter of price stability which will eventually lead to the unrest in the markets resulting in the less consumption of raw materials and manufacturing of other products in the economy due to increased level of prices. In the case of Lays; this product is also deemed to get affected by the ever rising prices of raw materials in the world. If the price of raw materials is going to increase like this then people are more likely to settle to other products for eating and will ignore these products that are available in the market at higher rates even though they are available in proper hygienic format with application of world standards in their manufacturing.