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Old 29th April 2012, 12:02 AM   #1 (permalink)
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JC1 H1 Econs help...

The question is:
Michelle works for a company selling coffee and her salary is tied to the revenue of the company. Sales revenue is calculated by the product of the price of each good (P) and the quantity of the goods (Q) sold. When the price of coffee increases, Michelle is worried. However, the reaction of her managers is different. Why is Michelle worried but not her manager?

This is about Price Elasticity of Demand... I pretty much understand the chapter, but I have a load of trouble applying it

I assume that the price of coffee is price elastic as there are many substitute beverages such as tea, and therefore when the price increases the quantity will drop by a more than proportionate amount, leading to a loss in revenue and therefore Michelle is worried as her salary is tied to the revenue. But what about the manager, why doesn't he care??? He must benefit from this somehow, but what is it?! It's driving me up the wall.

Help would be appreciated

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Old 29th April 2012, 12:59 AM   #2 (permalink)
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Re: JC1 H1 Econs help...

I really need a quick reply because if I don't hand up my tutorial on time I am seriously screwed.

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Old 29th April 2012, 09:02 AM   #3 (permalink)
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Re: JC1 H1 Econs help...

Anyone?
My life is in your hands, please don't let me get killed D:

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Old 29th April 2012, 09:37 AM   #4 (permalink)
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Re: JC1 H1 Econs help...

dunno if correct anot, since nt really econs explanation haha
managers are concerned of profits. so as long as rise in cost is less than decrease in revenue, company make an extra profit. managers happy, but michelle not happy

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Old 29th April 2012, 09:40 AM   #5 (permalink)
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Re: JC1 H1 Econs help...

possible case is if MC > MR currently, company need to decrease production to make MC=MR for profit maximization

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Old 29th April 2012, 12:16 PM   #6 (permalink)
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Re: JC1 H1 Econs help...

Originally Posted by pigpig01234 View Post
possible case is if MC > MR currently, company need to decrease production to make MC=MR for profit maximization
I see... thanks

Oh yeah, one more question:

Background info is: Oil markets have entered a "super-spike" period that could see 1970s-style price surge as high as US$105 a barrel, Goldman Sachs said in a research report. This is due to thin spare capacity in the energy supply chain, and long response time in bringing on supply additions. In addition, the robust demand in the US and in developing heavyweights China and India adds to the price increase. This resembled the 1970s when oil prices spiked dramatically following the Arab oil embargoes on supply to the West and Iran's Islamic revolution. High energy prices then threw the world into recession, and triggered several years of declining oil demand.

Question: Analyse the effects of the rise in oil prices on various groups of producers. [5]

How do I answer this? All I know is that the supply curve is inelastic D:

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Old 29th April 2012, 01:34 PM   #7 (permalink)
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Re: JC1 H1 Econs help...

Originally Posted by WoShiDavid95 View Post
The question is:
Michelle works for a company selling coffee and her salary is tied to the revenue of the company. Sales revenue is calculated by the product of the price of each good (P) and the quantity of the goods (Q) sold. When the price of coffee increases, Michelle is worried. However, the reaction of her managers is different. Why is Michelle worried but not her manager?

This is about Price Elasticity of Demand... I pretty much understand the chapter, but I have a load of trouble applying it

I assume that the price of coffee is price elastic as there are many substitute beverages such as tea, and therefore when the price increases the quantity will drop by a more than proportionate amount, leading to a loss in revenue and therefore Michelle is worried as her salary is tied to the revenue. But what about the manager, why doesn't he care??? He must benefit from this somehow, but what is it?! It's driving me up the wall.

Help would be appreciated
I'm assuming you're intending to write a commentary essay in response to this question, if so:

1) Define the theories that you are going to apply to answer this question (usually you'd define the key terms too, but since Sales/Total revenue is already defined I don't see any need for that) BUT you have to define price elasticity of demand since that's the major topic at hand.

Now, I think you're having problems because you're assuming that coffee's demand is price elastic when it should be price inelastic. Yes there are alot of replacements for coffee such as tea but can how close of substitutes are they? (You can add on that you can use the cross elasticity of demand here to find out). There are much more factors that show that coffee is price inelastic (proportion of price of product to income), (necessity of good, coffee's considered an addiction y'know) and many others which will show that coffee is infact price inelastic.

Her managers are not afraid of the increase in the price of coffee because they know that that when the price of coffee increases, because the demand for coffee (remember that the word "demand for" has to be there) is price inelastic, the ratio of the quantity decreased for coffee when the price for coffee increases is less than 1 (aka price inelastic), therefore they are confident that when the price increases for coffee. There will be an overall increase in total revenue (you draw a graph here showing the very steep demand curve for coffee and the price change which affects quantity demanded)

Hope this helps, personally I have no idea why Michelle is afraid, maybe she's just scared that the increasing price will lead to decrease in customers coming to buy coffee, maybe she's just dumb.

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Old 29th April 2012, 01:37 PM   #8 (permalink)
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Re: JC1 H1 Econs help...

Originally Posted by WoShiDavid95 View Post
I see... thanks

Oh yeah, one more question:

Background info is: Oil markets have entered a "super-spike" period that could see 1970s-style price surge as high as US$105 a barrel, Goldman Sachs said in a research report. This is due to thin spare capacity in the energy supply chain, and long response time in bringing on supply additions. In addition, the robust demand in the US and in developing heavyweights China and India adds to the price increase. This resembled the 1970s when oil prices spiked dramatically following the Arab oil embargoes on supply to the West and Iran's Islamic revolution. High energy prices then threw the world into recession, and triggered several years of declining oil demand.

Question: Analyse the effects of the rise in oil prices on various groups of producers. [5]

How do I answer this? All I know is that the supply curve is inelastic D:
1) Define key terms
2) List out demand factors and supply factors
3) State the new market equilibrium/possible new market equilibriums ( you have to judge whether or not the NEW quantity will shift to the left / right based on how many dd/ss factors you have
4) Various group of producers - people that consume oil to produce their products (ALL companies need oil for transportation of goods etc). Petrol sellers etc
5) Conclusion, is it good or bad, bla bla bla done

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Old 29th April 2012, 02:32 PM   #9 (permalink)
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Re: JC1 H1 Econs help...

haha khan wei, i think must state a reason why michelle is scared, cant just say dumb lol in exam. haha i also tot maybe coffee is inelastic, considering it is sort of a "necessity". but since michelle is scared, i guess best case scenario is assume a price increase will lead to a drop in qty dd and den a decrease in revenue.

haha anyway its a long time since i do jc econs like 5 or 6 yrs i maybe outdated.
hmm anyway david, the second qn i also nt really sure. cant really think of who is the various grp of producers
but maybe can say since oil market is controlled by a few dominant players, it is an oligopoly. coupled with inelastic supply, the rise in oil prices will likely benefit the oil producers more as they earn supernormal profits. Then bring in the inelasticity of price of oil

High oil prices will also lead to inflation, which could lead to increase cost of production for the other various producers in the other sectors, which will in turn lead to lower profits and lower demand as consumer cuts back on their consumption. This reduced demand will push demand curve to the left, causing the economy to operate below max potential GDP, causing a recessionary gap.

i.e. conclusion, rise in oil price: BAD BAD

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Old 29th April 2012, 02:35 PM   #10 (permalink)
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Re: JC1 H1 Econs help...

can say something about the supply being inelastic in the short term too, but slightly more elastic in the long term so as to answer the part about long response time in bringing on supply additions, hence short term price hike will be more serious than long term, as the market cant adjust the supply curve immediately to the market

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Old 1st May 2012, 10:06 PM   #11 (permalink)
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Re: JC1 H1 Econs help...

Originally Posted by pigpig01234 View Post
haha khan wei, i think must state a reason why michelle is scared, cant just say dumb lol in exam. haha i also tot maybe coffee is inelastic, considering it is sort of a "necessity". but since michelle is scared, i guess best case scenario is assume a price increase will lead to a drop in qty dd and den a decrease in revenue.

haha anyway its a long time since i do jc econs like 5 or 6 yrs i maybe outdated.
hmm anyway david, the second qn i also nt really sure. cant really think of who is the various grp of producers
but maybe can say since oil market is controlled by a few dominant players, it is an oligopoly. coupled with inelastic supply, the rise in oil prices will likely benefit the oil producers more as they earn supernormal profits. Then bring in the inelasticity of price of oil

High oil prices will also lead to inflation, which could lead to increase cost of production for the other various producers in the other sectors, which will in turn lead to lower profits and lower demand as consumer cuts back on their consumption. This reduced demand will push demand curve to the left, causing the economy to operate below max potential GDP, causing a recessionary gap.

i.e. conclusion, rise in oil price: BAD BAD
to answer why Michelle is worried, it's probably because she's the waiter and only sees the decreasing amount of customers and is unaware of the total revenue increasing, that's why she's worried.

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