National Foods Limited is a prominent supplier of the spices in Pakistan as well as abroad. It was established in 1970 as a spice company. The aim of this company is to make food hygienic, foster health and decrease the time of women in the kitchen. This company introduced Computerized Reporting Yield for Sales and Trade Automation Landscape which is helpful for the distributor to book their orders through mobile phones. By this activity, cost of sales reduced from 15.5% of the sales revenue in year 2013 to 13.1% in year 2014 and sales volume of the company has been pushed up by 13.8%. There are some other companies like Shan Foods, Chef Pride and Mehran which sell spices. As National Foods enjoys the reduced sales cost so it is planning to reduce the prices of spices.
Being a student of Managerial Economics, describe how reduced price decision will affect the demand of other suppliers like Shan Foods, Chef Pride and Mehran if they keep prices of spices unchanged. Also explain which concept of elasticity will apply in this situation.
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Well, just to let you guys start with the basic idea, we are talking "Substitutes" here, so people will surely tend to shift from a product to its substitute if there is a decrease in its (substitute's) price. Same is the case here, as National Foods are lowering their prices People who were using other Brands like Shan, Mehran, will surely be attracted towards National Foods and subsequently, the Sales of National's Substitutes will decline. Elasticity of demand in this case is high as a minor change in price can lead to a notable change in its demand.
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we are asked about elasticity of demand here nobita, which is surely significant or in other words we can say it is greater than 1, ed > 1 . And this is because a minor change in National's prices k can towards a major change in demand of National's substitutes. This is what i think about the given scenario, you guys are welcomed to share your thoughts.
tariq bhai i cant understand how to solve this gdb plz help me
The given scenario falls in direct demand or personal consumption product. The Shan foods, Chef Pride & Mehran are competitors of National Foods as these are related commodities thus, according to Law of Demand, there is an inverse relationship between the price of a good and quantity demanded per time period. This can be achieved by assuming, for the moment that the individuals income, the price of related goods and tastes are unchanged. Thus if the prices of a commodity decreases provided the prices of related goods remains same, it will affect the demand of the related goods in a way that, there will be a decrease in the demand of the related goods (Shan foods, Mehran & Chef Pride) and increase the demand of that commodity.
The elasticity measures the sensitivity or responsiveness of the dependent variable to the percentage change in the independent variable.
In the given scenario, the concept of “ Price Elasticity of Demand” will be applied. The elasticity measures the responsiveness of the quantity demanded (dependent variable) to the percentage change in the price of the product (independent variable), holding constant the values of all other variables in the demand function. If a commodity is defined so that it has very close substitute, its price elasticity of demand is likely to be large indeed and may be close to infinity. The same is in our given scenario thus, the reduction in the prices of National Foods will greatly reduce the demand of Mehran, Chef & Shan Foods as their prices remain unchanged.
Following are the variables of demand functions;
The demand function is expressed in equation form as under;
QDx= f(Px, N,I,Py,T)