The firm I chose deals in large scale production of furniture especially cabinets and chairs for learning institutions, the main input being wood. Two factors that may influence the use of wood in the firm include government policies and the price of substitute input, which in this case is plastic.
To begin with, policies have been formulated to deter people from logging in an effort to conserve the environment (Mankiw, 1998, p. 98). As a result, this has greatly affected the availability of wood forcing the firm to shift focus to other materials such as plastic. Such policies have led into reduced use of wood in the firm because the input has become very expensive. In addition, there is increased tax rate by the government on the firm and consequently a reduction in the profits.
This additional tax has made the cost of production quite expensive hence the firm has been forced to cut down the level of production, which means less use of the input. Moreover, the technological advancement has enabled large scale production of plastic that could be used as a substitute to the wood input.
Since the plastic input is much cheaper compared to wood and the firm deals mainly in production of furniture for schools, it is shifting from the use of wood to plastic input.
Is your firm’s price elasticity of demand relatively elastic or inelastic?
Price elasticity of demand is a measure of how price affects demand. Change in price may or may not affect the demand. If the demand is significantly affected by price, change in the demand is perceived to be elastic but if it is not affected by price change, it is considered inelastic.
When the proportion in the amount of good demanded is less than the price change then the demand is considered inelastic (Arnold, 2011, p. 137). On the other hand, it is considered elastic if the change in quantity demanded is more than the percentage change in price. The chosen’s firm’s price of demand will be relatively elastic. This is due to the fact that a significant rise in the cost of wood will definitely force the firm to cut the quantity used. The high price of wood has forced the firm to venture into substitute goods.
Factors that influence price elasticity of demand
Two factors that influence the price elasticity of demand for this input are availability of substitute goods and the percentage of income earned. Availability of substitute goods will always be an overriding factor when it comes to price elasticity of demand. In this case, the high price of wood and availability of plastic as a substitute will make the firm shift to using plastic so as to cut on the cost of production. The firm’s percentage income from its wood furniture may influence the demand for wood.
If customers are willing and able to buy the wood furniture at a high price, then the firm will continue using wood regardless of the price. This will therefore make the price elasticity of demand of wood to be inelastic (Mankiw, 1998, p. 121). However, this may not be the case since buyers will most likely tend to buy substitute goods if those produced using wood become expensive. This implies that the price elasticity of demand for the input will be elastic.
What will the market demand for this input be in five years and briefly why?
The market demand for this input in five years is expected to rise significantly. This is because the environmental policies that have been put in place are meant to restrict logging and as a result, the supply of wood will reduce. With many firms using wood as an input, the demand will rise with increase in scarcity.
References
Arnold, R. A. (2011). Microeconomics. Mason, OH: South-Western, Cengage Learning.
Mankiw, N. G. (1998). Principles of macroeconomics. Mason, OH: South-Western Cengage Learning.