Managerial Economics

Hypothetical Business Model

Group members

FAHAD ALI MIRZA 121103FAIZA RIAZ 121107

FAROOQ HAIDER 103119

Purpose Statement

Managers make effective business decisionsLearning the field of managerial economics (market structure, pricing strategy and competition ).

Problem statement

Problem statement

Gourmet chocolate

Market Conditions of Chocolate Industry

Hilal B.P sweets Cadbury’s Kidco Mayfair Mitchells Sweet Hills

SWOT ANALYSIS

Strength

Weakness

Opportunities 

Threats

Strong Demand

Levels of Flavor

Preferred in Children

All firms are able to enter and Exit

Non Branded Substitute

Market Power everyone Holding

Hot temperature Melting

Free entry & exit

Taste change

Chocolate Variety

Richer Chocolate

Industrial Conditions

Health Conditions

Market Structure:

Monopolistic competition.Produce differentiated products.Freedom of entry and exist.

Available substitute

PerkJubileeDairy milkKit KatSnickersBountyMars

Price Comparison

GOURMET chocolate

Dairy milk chocolate

Price Rs. 15 Rs. 17Weight 10 grams 10 grams

Flavor ComparisonGOURMET chocolate Cadbury Dairy milk

chocolateMilky chocolateDark chocolateWhite chocolateWafer chocolatePeanut chocolateAlmond chocolateTreat chocolateMint chocolateCrackers chocolate

PeanutsRaisinsWhite ChocolateBourneville (original)Bourneville AlmondCrunchy (original)Crunchy RocksDairy Milk HazelnutBlackcurrant & Vanilla

Impact of elasticity!!!

If demand function is;

Q = 40 – 2P

E = -2(15/10).

E = -3

3> 1 in absolute terms

This shows that the demand of GOURMET chocolate is highly elastic.

Cost for the maintenance of Labor and Equipment

Cost of Labor (variable)

Cost of equipment (fixed)

Wage rate per day = Rs.333

Wage per labor each month = Rs.10, 000

No. of labor units employed = 16

Total cost of labor per month =

Rs. 160,000

Sales per month

Questions???

Question # 1

At what price Gourmet chocolate should be sold to maximize profit?

Answer!!!Where MC = MRDemand functionQ = 40 – 2P Cost functionC (Q) = 4 +0.1 Q2

TR=P*Q

TR=(20-1/2Q)Q

TR=20Q-1/2Q2

MR=20-Q

MC=Q

MC = MRQ = 20 – QQ = 10 gmsP = Rs. 15At price of Rs.15 Gourmet can maximize its profit.

Question # 2

How does the cost of Dairy milk chocolate affect sale of Gourmet chocolate?

Answer!!!

We can use Cross price elasticity in order to know the effect of prices of Dairy milk chocolate on the Gourmet chocolate demand i.e. E = %∆ Gourmet / %∆ P CadburyWhere; E = 310% increase in price of Cadbury milk chocolate causes the increase in quantity demanded of Gourmet chocolate to 30%.

Question # 3

If a severe snow storm raises the price of coca beans, should the Gourmet sell chocolate and if so, at what price?

Answer!!!

Price and cost Result

P > ATC Profit maximization

ATC > P > AVC Loss minimization

P < AVC Shutdown point

cont

• C(Q)=4+1.5Q2

• Q=40-2P

• 2P=40-Q

• P=20-0.5Q

•  

• R=P*Q

• R=[20-0.5Q]Q

• R=20Q-0.5Q2

cont• MR=20-Q•  • MR=MC• 20-Q=3Q• 4Q=20• Q=5•  • P=20-0.5(Q)• P=20-0.5(5)• P=20-2.5

cont• P=17.5

• Profit=R-C

• Profit=PQ-C

• Profit=[1705*5]-[4*1.5(5)2]

• Profit=87.5-41.5

• Profit=46

•  Variable cost=Total cost-Fixed Cost

• =41.5-20

• =21.5

cont

• AVC= VC/Q

• =21.5/5

• =4.3 per unit

Example Cost before flood C1 = Rs. 14 (according to the given cost function: C = 4 + 0.1Q2)Cost after flood C2 = Rs. 154 (according to the new cost function: C = 4 + 1.5Q2)The existing price is Rs.15 The existing revenues are 15 * 10 = Rs.150New MC = 3QMR = 16 – QWhen MC = MR3Q = 16 – Q4Q = 16Q = 16 / 4Q = 4 gmsP = 20 – 1/2 (4)P = Rs. 18This shows that the price will increase Rs.3 more than the previous one.Now the revenues are (18 * 4) = Rs.72

Question # 4

Can the Gourmet remain competitive if an overseas chocolate producer pays 30 percent more for cocoa beans but pays 20 percent less for labor?

cont

• New entry of firm

• NO competitive

Answer!!!

Not be more competitive of Gourmet.

Total variable cost of the overseas company will increase it will result in incase of the price of chocolate

Example

Gourmet chocolate Dairy milk chocolate

Labor cost = Rs. 88Cocoa beans cost = Rs. 100

Labor cost = Rs. 70Cocoa beans cost = Rs. 130

TC = FC +VC

TC = 20 + ( 100+88)

TC = 20 + 188

TC = 208

TC = FC +VCTC = 20 + ( 70+130)TC = 20 + 200TC = 220

Conclusion

• At Rs. 15 per 10 gms of chocolate, GOURMET chocolate should be sold to maximize its profit.

• The cost of cadbury Chocolate affect sale of Gourmet chocolate i.e. 10% increase in Cadbury Chocolate causes to increase in quantity demand of chocolate to 30%