Elasticity
The price elasticity of demand is an essential economic instrument without which entrepreneurs cannot make crucial decisions on markets, business performance, and competitive approaches. Consumers vary their consumption level of commodities depending on the utility they derive from them, which makes goods and services show different elasticity. Overall, essential commodities show inelasticity to demand, while non-essential products have elastic demand, which uniquely affects pricing strategies.
Commodities with Elastic Demand
Commodities with elastic demand show that consumers substantially change the quantity of commodity during purchase due to economic factors, particularly price and income level. The reduced demand results from forgoing the goods and services or purchasing an alternative product to achieve the previous utility (Vukadinovic et al., 2017). These commodities include luxury goods and certain beverages, which consumers can forgo or seek alternatives. For instance, raising the price of juice drinks can force consumers to purchase other soft drinks, leading to reduced demand. Therefore, they have demand elasticity because raising juice prices prevent consumers from buying them.
Commodities with Inelastic Demand
On the other hand, consumers cannot do without essential commodities with inelastic demand. Consequently, they will constantly purchase them regardless of price increases or reduced disposable income. Their demand remains static despite the changes in the economic forces since other commodities cannot replace them. Products with inelastic demand include prescription medicine and tobacco since patients always need treatment for ailments, and cigarette addiction prevents addicts from functioning properly without smoking (Hall & Boyle, 2021). The inelasticity results from consumers’ inability to survive without them or substitute them. Business owners control commodity prices depending on their demand elasticity.
Marginal Analysis
Entrepreneurs also make pricing decisions through marginal analysis, which compares the additional benefits with the additional incurred costs from economic activity. This decision helps to maximize profits since businesses can evaluate ventures to discover portfolios with the largest profit margin (Gao et al., 2019). In essence, businesses incur different costs during production and product delivery, including salaries, marketing, and miscellaneous expenses.
Economists refer to these expenses as sunk costs since businesses incur them at the beginning of an operation and cannot recover them (Gao et al., 2019). Consequently, the marginal analysis ignores these charges and considers the additional costs that yield additional profits. Primarily, marginal analysis is a good pricing decision-making tool since it accounts for additional costs’ impact on profitability. As a result, entrepreneurs can increase commodity prices which yield higher returns.
Additionally, marginal analysis supports efficient decision-making during pricing since it enables entrepreneurs to observe the smallest changes within a standard operational sphere. When business owners increase output by a small percentage, the marginal analysis enables them to study the impacts of this incremental change on other outcomes, such as product quality and resource utilization. The cost attached to these changes helps establish the viability of increased output. For instance, resource utilization determines the cost of production, while product quality impacts the quantity of commodity purchased.
Considerably, a small decision has a compounding impact that business owners can assess to ascertain the impacts of a decision (Gao et al., 2019). Therefore, marginal analysis is a vital tool for making pricing decisions after ignoring the sunk costs since it supports the assessment of the impacts of the decision on overall business performance.
Impacts of Opportunity Cost on Decision-Making and Trade
Economists have based opportunity cost on the premise that consumers always strive to obtain maximum utility and meet their unlimited wants, although they have limited income and resources. The limited disposable income forces them to forgo the chance to enjoy a given utility after buying a specific good or service. Forgoing the opportunity does not eradicate the desire, and consumers always have the feeling of missing out on an important utility. Therefore, opportunity cost stems from three concepts: unlimited wants, consumers pursuing maximum satisfaction, and limited resources or income (O’Boyle, 2020).
Understanding this concept allows business owners, consumers, and society to make vital decisions that impact their economic choices. Specifically, opportunity costs allow consumers and producers to understand that the choice to forgo a decision is feasible and enables them to attain maximum satisfaction (O’Boyle, 2020). Therefore, they can rank their desires and perform a feasibility study to identify the needs worth satisfying at a given instance.
Opportunity cost also facilitates trade by allowing people to transact their goods and services for returns, which gives them more satisfaction than the commodity they sold. Entrepreneurs analyze their expected returns from various ventures and select the option with the largest long-term profit. For instance, a farmer with a large track of land performs an opportunity cost analysis to identify the crop with the best returns from a given investment. They cannot venture into a farming activity without profitability, regardless of their interest in the activity (O’Boyle, 2020). Further, opportunity cost determines the demand for commodities, which, in turn, influences the pricing decisions and trading activities.
Impacts of Good Decision Making
Good decision-making benefits producers, consumers, and society by regulating prices and profitability index. Through marginal analysis, producers make pricing decisions while analyzing their incremental impacts on revenue to ensure that the undertaken activities yield the anticipated returns. On the other hand, opportunity cost decisions allow consumers to select their preferred commodities after comparing the utility they derive by consuming them (O’Boyle, 2020).
Importantly, these decisions also uphold ethics, which, in turn, benefits society. Assessing the elasticity of demand incorporates the deontological approach to ethics by ensuring that producers do not raise the prices of commodities with inelastic demand since consumers buy them at any price (Tanner et al., 2008). This approach investigates the rightness or wrongness of actions to promote the accountability of producers and protect society. Conversely, the consequential approaches judge the morality of practices based on consequences (Tanner et al., 2008). Therefore, it does not fully protect society since it justifies price increases to regulate demand and supply. Overall, moral decisions benefit producers, consumers, and society.
References
Gao, G., Liu, X., Sun, H., Wu, J., Liu, H., Wang, W., Wang, Z., & Du, H. (2019). Marginal cost pricing analysis on tradable credits in traffic engineering. Hindawi Mathematical Problems in Engineering, 2019, 1-10. Web.
Hall, M., & Boyle, M. J. (2021). Elasticity versus inelasticity of demand: What is the difference? Investopedia. Web.
O’Boyle, E. J. (2020). Opportunity cost, decision-making, limits, and human development. Personalist Economics. Web.
Tanner, C., Medin, D. L., & Iliev, R. (2008). Influence of deontological versus consequentialist orientations on act choices and framing effects: When principles are more important than consequences. European Journal of Sociology, 38, 757-769.
Vukadinovic, P., Damnjanovic, A., & Krstic, J. (2017). The analysis of indifference and the price elasticity of demand between different categories of agricultural products. Ekonomika Poljoprivrede, 64(2), 671-685.