Price Elasticity

Price elasticity is how much the demand of a product or service will change when the price changes. When a price is elastic, it means that when the price changes, the demand will also change. When a price is inelastic, it means that the demand remains relatively the same.

The factors that influence the elasticity of a price includes:

• The competition. If there are numerous companies producing the same type of product, the price elasticity will increase as the demand from consumers would definitely rise if one company drops its price.
• Needs or wants? Products that fall under the "need" category often have prices that are inelastic as people NEED them and most of the time a little change in the price would not affect the demand of the customers. Whether the price is high or not, there is not much of a choice. However, those products that fall under the "want" category (which are usually luxury goods and services, such as entertainment) are elastic and the demand is dependent on the price. This is because they are not necessary in the daily lives of the consumers and people would only opt for it if the price is relatively low or if they have enough money to spend.
• Loyalists. When consumers love a product so much that they will be 'loyal' to it no matter what the price is, they wouldn't mind spending money on it. Therefore, this will cause the product to have an inelastic price. Examples of this can include technological devices Apple products (iPhones, iPads) or habitual products like cigarettes.

The price elasticity of a product can be calculated using the following formula:

Elasticity = (% change in demand / % change in price)

If the price elasticity is...

• more than one, it is price elastic

• less than one, the price is inelastic

• equals to one, the product is unit elastic. This means that the change in demand is proportionate to the change in price. Every unit of price increase, increase the unit of demand for the good. 
• equals to zero, the product's price is perfectly elastic. This means that no matter how much the price changes, the demand for the goods will not change. (Though I think this is almost impossible to find) The demand curve for this type of price will have a vertical line with an undefined gradient)

Works Cited

Investopedia.com. "Economics Basics: Elasticity." Investopedia – Educating the World about Finance. Investopedia.com, 2003. Web. 11 Dec. 2012. <http://www.investopedia.com/university/economics/economics4.asp>.

Tutor2u. "Price Elasticity of Demand." Tutor2u. Tutor2u, n.d. Web. 11 Dec. 2012. <http://www.tutor2u.net/economics/content/topics/elasticity/elastic.htm>.

How do we decide?...

How do we decide HOW to produce?

After deciding on what to produce, businesses have to know how to produce them.

• What machinery will they need?
• How much manpower is required? Will there be any professionals that need to be hired?
• What kind of production method will be used?
• How much is needed to be produced? How many products can be kept? How long can these products be kept? Will there be a balance of inflow and outflow of products to the warehouse?

Example:

A company would like to produce palm oil to sell in Malaysia. First, they would have to buy a plot of land that is suitable for planting palm trees. Then they would have to investigate the most effective techniques to gain the most out of these palm oil. After investigation, a factory would need to be constructed to process the raw materials into goods to be sold. When everything has been set up, the company would then need to hire workers to work in the plantations and factories, as well as people who are experts in this field to supervise the entire production. 

The method of production would also then have to be considered. As oil is quite a necessity in the consumers' life, a lot of oil would need to be supplied to meet the demands of consumers. Therefore mass production would used as the production method, where workers work on specific tasks each (from the plantation, to processing the raw materials, to packaging the product)

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How do we decided WHEN to produce?

Sometimes, products can be produced all year round as the demand would be quite consistent (such as food, technological devices etc.)

However, some products must be produced according to the season or festivals around that time. (e.g. clothes) For example, during Chinese New Year, clothes factories would usually produce more Chinese traditional clothes; during Hari Raya, more traditional Malay clothes would be produced; during Deepavali more traditional Indian clothes would be produced. Not just clothes, but other accessories like ornaments, red packets and many more. (e.g. Christmas trees and decorations during Christmas). 

No business would produce products for a different season, as no consumers would buy them and the business would suffer a great loss.

How do we decide?...

In businesses, it is important to know the demand of the customers as well, and what, how and when to produce goods and services.
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How do we decided what to produce?

Well, businesses can usually decide what to produce by analyzing the demand of their target consumers. It can also be decided from the region the target of customers are from as the culture can differ in different areas of the world. Therefore, the main influence on how we decided what to produce is CUSTOMERS.

When market research is carried out, the things that should be researched on is what the customers usually

• need (daily necessities: food, toiletries etc.) and 
• want (technological gadgets, entertainment products etc.). 

Often, trends and norms should be observed in order to know what is 'hot and selling'

• (for example: the current craze for smart phones and tablets). 

Studies should also be done on the consumers:

• What is the biggest trend in the group of consumers? 
• What is the main age group of the consumers? 
• (This can determine what kind of products to produce. For example, if there are many students in the consumer target group, then stationary, notebooks, textbooks and revision books can be produced. If there are a lot of working adults in the target group, then technological devices, laptops and organizational tools would be produced. If there are a lot of families with young children in the area, then children products and toys can be produced as well.)
• How are they attracted to products? 
• (This will determine how the products are to be packaged and marketed)
• What are the traditions and festivals in the local area? What is the geographic location of the target area?
• (E.g.: In Malaysia, there are many different cultures and customs from the range of different ethnic groups of the population. Businesses have to produce products that fit the culture. The products they produce in a certain region that may be very popular may be very usefulness in other regions. Like selling winter coats in a tropical country. As there is not a need for it, the demand for winter coats would be extremely low and therefore the business may suffer.)

After conducting research on consumers, business would then have to consider many factors in their business to analyse whether the production of certain products are possible. Factors that may influence this includes:

• The type of product to be produced (does it require raw materials? Is machinery required? Is a large plot of land needed?)
• The physical factors (the geographic location of the factory, the weather, etc.)
• Economical factors (how much am I allowed to spend on the production of these products? Will the sales money be enough to break even and make a profit?)
• Do I have enough manpower?
• Governmental policies (is the production of my product allowed by the local government?)
• What kind of product would be the most attractive to consumers yet cheap to produce?

BBC. "Factors Affecting Farming." BBC News. BBC, n.d. Web. 11 Dec. 2012. <http://www.bbc.co.uk/bitesize/standard/geography/farming/farming_system/revision/2/>.

Topic for Today: Production!

Production is very important in businesses, especially in those in the secondary sector (in which they manufacture raw materials and produce goods and products). The BusinessDictionary.com defines it as:

"The processes and methods used to transform tangible inputs (raw materials, semi-finished goods, subassemblies) and intangible inputs (ideas, information, knowledge) into goods or services. Resources are used in this process to create an output that is suitable for use or has exchange value."
(source: http://www.businessdictionary.com/definition/production.html#ixzz2E8SnXKgU)



These are some keywords from Complete Business Studies for Cambridge IGCSE and O Level textbook ( Brian Titley ,Chapter 3.2 Production): 

Production : "Using resources to provide goods and services to satisfy consumer needs and wants"
Productivity: "A measure of the efficiency of use of resources in a business by comparing the volume or value of output with resource inputs used in production."
Labour productivity: "Average output or revenue per employee"
Factor Substitution: "Replacing one factor of production with another in a production process. For example, advanced capital equipment has replaced labour in many modern production processes."


Works Cited:
Titley, Brian. "3.1 Production (operations Management) Decision Making." Complete Business Studies for Cambridge IGCSE and O Level. Oxford: Oxford UP, 2011. 263-96. Print.
WebFinance, Inc. "Production." What Is ? Definition and Meaning. WebFinance, Inc., n.d. Web. 05 Dec. 2012.