Decision Making based on Opportunity Cost-Free-Samples for Students

Questions: 1.As a producer, why is it important to consider the Price Elasticity of Demand of your Product when setting the price you are going to charge? 2.Explain the difference between Comparative advantage an absolute advantage. Answers: 1.Introduction The price for normal goods is the primary determine of the quantity demanded. The consumer behavior is such that they want to maximize utility but by spending the least money possible. Thus they tend to buy more goods when the price is low but less goods when price is high. Analysis The concept of Price Elasticity of Demand (PED) is to show how a unit price change influences the quantity demanded (Pal, 2016). Competition creates a need to charge the best price to attract more customers. Selling at very high price may shift customers to make their orders from other suppliers offering at lower price. Its not price of a good alone that mainly influence demand; the type of good also affect demand. For instance, the demand for a good with close substitutes fall when the producer raises own price. On the other hand, the demand for unique products does not change much when price is raised Fig (a) Elastic Demand(b) Inelastic Demand The change in price affects demand differently; in fig (a), demand is elastic, meaning that the change in demand that results from a small price change is very high (Chand, 2016). Its thus not advisable to raise price in this case. In figure (b), where demand is inelastic, the change in demand is low even with a big price change. This is the best case to raise price. Conclusion PED is an important sales tool for the producer as it guides him/her on when to lower or raise prices and at the same time achieve the objective of increasing revenue. Elastic demand is not suitable for price raise; on the other hand, price could be raised under inelastic demand 2.Introduction Absolute and comparative advantage are two concepts mainly used in international trading (Schumacher, 2012). The concepts may also however be used locally in comparing the efficiency and opportunity cost between two parties. In international trade, a country cannot produce everything or import everything. It only produces that which it can effectively and import that which it cannot. Analysis Absolute advantage means that a producer is able to produce more effectively than the other. On the other hand, opportunity cost is used to define the comparative advantage; this is where the producer has a lower opportunity cost in producing a certain good compared to a similar producer (Perera, 2016). For instance, assume two countries, U.S and Australia that produces two goods (maize and wheat). U.S can either produce 50 bags of maize or 25bags of wheat. Australia can either produce 40 bags of maize or 10 bags of wheat. In this case, the U.S has an absolute advantage in both maize and wheat production since it has an ability to produce more compared to Australia. However, if the U.S produces maize, it foregoes 25/50 or 0.5wheat bags, but Australia foregoes only 10/40 or 0.25 wheat bags after producing bags of maize. Australia has a comparative advantage in maize production. U.S has comparative advantage in wheat production. Australia should thus specialize in maize production and U.S on wheat production and both can trade. Conclusion Absolute and comparative advantage is an essential concept that facilitates international trading. It is also used for saving costs. Costs is not the only factor that is explained by this concept; time may also be a factor where one party may have absolute or comparative time advantage over the other. Comparative advantage is essential for specialization. References Chand, S. (2016). The Importance of Elasticity of Demand (5 Important Points). YourArticleLibrary.com: The Next Generation Library. Retrieved 2 August 2017, from https://www.yourarticlelibrary.com/economics/the-importance-of-elasticity-of-demand-5-important-points/8964/. Pal, D. (2016). Elasticity of Demand and Supply (With Diagram).Economics Discussion. Retrieved 2 August 2017, from https://www.economicsdiscussion.net/elasticity-of-demand/elasticity-of-demand-and-supply-with-diagram/16244. Perera, G. (2016). Difference between Absolute and Comparative Advantage. Pediaa.Com. Retrieved 2 August 2017, from https://pediaa.com/difference-between-absolute-and-comparative-advantage/. Schumacher, R. (2012). Free trade and absolute and comparative advantage: a critical comparison of two major theories of international trade. Potsdam, Universita?tsverl