Question

DISCUSSION QUESTION: Pick a company and describe the good or service that they offer. Furthermore, assume that this company has complete pricing power in the market (even if it is, in reality, a very competitive market). If the company's goal is to maximize profits, do you think this company should increase or decrease the price of the good or service in question?

NOTE: The answer will depend on what you think of price elasticity of the good/service at the current price. So, why do you think that the demand for the good/service is elastic or inelastic, and how would you check, aside from running econometric models?

Answer 1

Dairy Farmers of America (DFA) , the largest dairy farm in the United States offers milk and milk products to a huge number of households in the United States. Dairy Farmers of America is one of the leading dairy chain firms in the world and its production and distribution of milk and milk products has set an example of its organization structure and proper implementation of the mechanism. If we assume that DFA has complete control over the pricing mechanism of dairy products in the country, then we would need to know that, dairy products are one of the essential products of the consumers and the consumer tends to not miss the consumption of this product unless there is an emergency which forces him to miss the consumption of this product. Now, if DFA controls and the complete pricing of such a critical and direly needed product in the market, and if the pricing of the product is not done properly, this will lead to a total disruption of he consumption of the dairy products in the market. DFA should ensure that the pricing mechanism of such critical products is properly implemented. If DFA decides to suddenly increase the price of milk and milk products in the United States, in the short run, there will be minimal change in the consumer demand for the products in the market. This is because, dairy and dairy products are essential products and people will tend to keep consuming these products. The elasticity of these products in the shorter run will minimal. Whereas, in the longer run, there will be a huge change in the consumer demand for the products in the market. This is because, dairy and dairy products are essential products and people will tend to keep consuming these products, but when consumers will feel the heat of the constantly increasing prices of these products, they will tend to reduce the consumption of these dire needed products gradually. The elasticity of these products in the long run will maximum.