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The concept of elasticity is useful for decision-making in management in three key ways: 1. Elasticity measures the responsiveness of demand to changes in price, which allows managers to predict how sales will respond to price changes and set prices to maximize revenue. 2. Understanding elasticity helps managers predict the impact of taxes on goods and use this information for tax-related decisions. 3. Elasticity analysis provides tools to estimate current and future demand for products, which supports decisions around production levels and product selection.

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358 views

Case Study

The concept of elasticity is useful for decision-making in management in three key ways: 1. Elasticity measures the responsiveness of demand to changes in price, which allows managers to predict how sales will respond to price changes and set prices to maximize revenue. 2. Understanding elasticity helps managers predict the impact of taxes on goods and use this information for tax-related decisions. 3. Elasticity analysis provides tools to estimate current and future demand for products, which supports decisions around production levels and product selection.

Uploaded by

yagrashok
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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SECTION B

CASE STUDY:

1. “Oil prices can rise rapidly and stay there only if price elasticity is very
low”. Explain.

Price elasticity of demand (PED or Ed) is a measure used in economics to


show the responsiveness, or elasticity, of the quantity demanded of a good or
service to a change in its price. More precisely, it gives the percentage change in
quantity demanded in response to a one percent change in price.

The overall consumption of oil has gone up. Oil prices described as �very
high� by many commentators have most certainly not �imploded� or
�cratered� the world economy. In fact the economy and oil prices have grown
together in remarkable symbiosis and interactivity since the most recent oil price
low, in early 1999. Today, it is incredible to think that contracts for crude changed
hands at 10 USD/barrel in 1999, but this was the case. Since then, and using
nominal dollars (unadjusted for inflation), prices have grown about 575%.

Elasticity is the concept economists use to describe the steepness or flatness of


curves or functions.

In general, elasticity measures the responsiveness of one variable to changes in


another variable.
Price elasticities are almost always negative, although analysts tend to ignore the
sign even though this can lead to ambiguity. Only goods which do not conform to
the law of demand, such as Veblen and Giffengoods, have a positive PED. In
general, the demand for a good is said to be inelastic (or relatively inelastic)
when the PED is less than one (in absolute value): that is, changes in price have
a relatively small effect on the quantity of the good demanded. The demand for a
good is said to be elastic (or relatively elastic) when its PED is greater than one
(in absolute value): that is, changes in price have a relatively large effect on the
quantity of a good demanded.

Revenue is maximised when price is set so that the PED is exactly one. The
PED of a good can also be used to predict the incidence (or "burden") of a tax on
that good. Various research methods are used to determine price elasticity,
including test markets, analysis of historical sales data and conjoint analysis.

2. How is the concept of elasticity useful for decision-making in


management? State examples to justify your points.

Application of economic principles to decision making in business firms or other


management units. The basic concepts are drawn from microeconomic theory,
but new tools of analysis have been added. Statistical methods, for example, are
increasingly important in estimating current and future demand for products. The
methods of operations research and programming provide scientific criteria for
maximizing profit, minimizing cost, and selecting the most profitable combination
of products. Decision-making theory and game theory, which recognize the
conditions of uncertainty and imperfect knowledge under which business
managers operate, have contributed to systematic methods of assessing
investment opportunities.

"Managerial Economics for Decision Making" places managerial


economics firmly in the context of decision making and provides readers
with the tools to use economic theory to make effective management
decisions.

Decision-making principle

One of the primary propositions of parecon is that all persons should have a say
in each decision proportionate to the degree to which they are affected by it. This
decision-making principle is often referred to as self-management. In parecon, it
constitutes a replacement for the mainstream economic conception of economic
freedom, which Albert and Hahnel argue that by its very vagueness has allowed
it to be abused by capitalist ideologues.

Participatory economics, often abbreviated parecon, is an economic system


proposed primarily by by activist and political theorist Michael Albert and radical
economist Robin Hahnel, among others. It uses participatory decision making as
an economic mechanism to guide the production, consumption and allocation of
resources in a given society. Proposed as an alternative to contemporary
capitalist market economies and also an alternative to centrally planned
socialism or coordinatorism, it is described as "an anarchistic economic vision",
[1] and it could be considered a form of socialism as under parecon, the means
of production are owned by the workers.

The underlying values that parecon seeks to implement are equity, solidarity,
diversity, workers' self-management and efficiency. (Efficiency here means
accomplishing goals without wasting valued assets.) It proposes to attain these
ends mainly through the following principles and institutions:

workers' and consumers' councils utilizing self-managerial methods for decision


making, balanced job complexes, remuneration according to effort and sacrifice,
and

Participatory Planning.

To address an alternative economic theory and to accompany by equally


important alternative visions in the fields of politics, culture and kinship. The
elements of anarchism in the field of politics, polyculturalism in the field of
culture, and feminism in the field of family and gender relations as being possible
foundations for future alternative visions in these other spheres of society.

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