Introduction
There is an extended number of approaches and tools that are useful for increasing the performance and income of firms. All business decisions should be informed and based on various data, including costs, prices, level of demand, and many others. The purpose of this paper is to analyze elastic and inelastic demand on the example of two particular products, discuss how marginal analysis leads to better pricing decisions, and explain the importance of opportunity costs. Finally, the final paragraphs will be devoted to the evaluation of the benefits of better business decisions for the producer, consumer, and society as a whole, and deontology and consequentialism as approaches to ethics will be contrasted.
Researching Elasticity Information for Two Particular Goods
With an Elastic Demand
It is hard to disagree that the demand for some products is more responsive to price changes than others. If the majority of people can easily refuse a product due to a significant increase in its price, the demand for it is considered elastic. According to Hofstrand (2020), “these are items that are purchased infrequently, … can be postponed if price rises,” and have more accessible substitutes (para. 2). An example is a washing machine: if prices increase significantly, people can either continue using their old washing machine or find a self-service laundry facility where one can wash their clothes for less cost. Buying a washing machine is not a necessity, so it is always evident that the demand for it falls when prices rise or the average income of people in the country reduces (Hofstrand, 2020). Considering the current situation in the world, it is possible to suggest that the demand for washing machines will drop.
With an Inelastic Demand
It is essential to mention that there are no products with a perfect inelasticity of demand. Although there is a group of highly essential goods that people need to purchase to survive or maintain a proper level of life, including electricity, food, and water, some persons still manage to decrease their use. Overall, if significant price changes do not have a severe effect on the demand for a specific product, the demand for it is inelastic. One such example is gasoline: car owners need to have petrol in order to get to work, go grocery shopping, and move around the city. Even when tourism becomes too expensive, people still need their cars for transportation.
Therefore, even increases in gasoline prices cannot significantly decrease the demand for it. According to Eitches and Crain (2016), “the estimated gallons purchased by a household has remained rather constant each quarter over the past 11 years,” and, from 2004 to 2014, “as gasoline prices increased, spending on gasoline also increased” (p. 3). Therefore, the demand for petrol is rather inelastic, but recent severe rises in its price may change the situation and make this good more elastic than ever before. Thus, it is possible to suggest that the demand for gasoline will fall severely in the nearest future.
Marginal Analysis for Better Pricing Decisions
There are many valuable tools and methods that allow for having a successful business and maximizing its profit. One such effective instrument is a marginal analysis that leads to better pricing decisions by avoiding sunk costs. According to economist Alfred Marshall, “production is only beneficial for a firm when marginal revenue exceeds marginal cost” (as cited in Ross, 2021). Thus, the value of marginal analysis is that it allows to examine the additional costs and benefits of a certain operation, and the results of this examination should serve as a basis for future pricing decisions. According to Gasparian et al. (2021), combining the information about marginal costs and marginal revenue is insightful for finding more effective price strategies. For example, if a company faces reduced demand for its products, it can perform a marginal analysis, define the marginal cost, and set the new prices closer to it to increase the demand.
Opportunity Costs
Another valuable concept used in business decision-making is opportunity costs. When a firm decides to spend a major part of its budget on purchasing new equipment, they lose the opportunity of spending this money on employee training or building an additional facility. Therefore, the concept of opportunity costs encourages companies to consider all the alternatives, compare their possible beneficial outcomes, and make more informed choices (Danzon et al., 2018). Further, as noticed by researchers from the University of Texas in Austin (2021), “trade is the consequence of comparative advantage” that helps businesses make better choices (para. 4). Thus, “optimizing for opportunity cost leads to acting for comparative advantage, which leads to trade” (The University of Texas in Austin, 2021, para. 4). Therefore, it is impossible to overestimate the value of the opportunity costs concept.
Benefits of Better Business Decisions
Most textbooks and blogs about having an effective business discuss the importance of proper decision-making. However, though they list the advantages of this process for the company itself, they rarely mention how customers and society as a whole can also benefit from a successful decision-making process. Producers should make better business choices to maximize their profit, have positive impacts on the environment, get a vast number of loyal and grateful customers, gain a competitive advantage, and make a contribution to the market development.
Further, consumers are also affected by good business decisions. They receive a number of firms that are truly concerned with customers’ needs, provide them with quality goods at an affordable price, care about their security, and perform all operations with transparency (Baker, 2021). Consequently, the better decisions a firm makes, the more satisfied the clients get. As for the whole community, it may benefit from effective business decisions related to environmental sustainability, job opportunities, and common economic health.
Deontology and Consequentialism as Approaches to Ethics
Ethics is important for business leaders as this study allows them to make moral choices, and morality is vital for organizations as it shapes their image. Two approaches, deontology and consequentialism, can help firms solve ethical issues. The former focuses on action characteristics and states that, even if the outcome is adverse, it is morally good if at least some of the traits are good (Frezza & Frezza, 2017). On the contrary, consequentialism evaluates actions based on their results: if the outcome is bad, the action itself is also morally wrong.
Conclusion
To draw a conclusion, one may say that companies should not underestimate the importance of the mentioned concepts for better decision-making. The elasticity of demand should be taken into consideration when setting prices for a specific product. Marginal analysis is also useful for more informative pricing strategies. The concept of opportunity costs is also rather influential in decision-making. Finally, it is recommended for companies not to forget about the value and benefits of better business decisions that provide advantages for producers, consumers, and the community as a whole, and consider consequentialism and deontological approaches to ethics.
References
Baker, J. C. (2021). How to make good business decisions. Business Expert Press.
Danzon, P. M., Drummond, M. F., Towse, A., & Pauly, M. V. (2018). Objectives, budgets, thresholds, and opportunity costs — a health economics approach: An ISPOR Special Task Force report. Value in Health, 21(2), 140-145.
Eitches, E., & Crain, V. (2016). Using gasoline data to explain inelasticity. Beyond the Numbers: Prices & Spending, 5(5), 1-6.
Frezza, E. E., & Frezza, G. E. (2017). Ethics and deontology in business. Austin Journal of Business Administration and Management, 1(2).
Gasparian, M. S., Kiseleva, I. A., Titov, V. A., & Sadovnikova, N. A. (2021). Modeling an enterprise’s operations based on marginal ideology. Nexo Revista Científica, 34(01), 457-468.
Hofstrand, D. (2016). Elasticity of demand. Iowa state University. Web.
Ross, S. (2021). How marginal analysis helps in managerial decisions. Investopedia. Web.
The University of Texas in Austin. (2021). Opportunity cost, comparative advantage and trade. Web.