Question

1. You learned the law of demand. Consequently, as a manager, you cut the price of your product in order to sell more quantity to your consumers. Is this good for your firm?
2. As a manager, how do you look at business flights for you and your employees as compared to how you view them as a consumer going on vacation? How does this relate to what you see when you’re shopping for airline tickets?
3. Why would an entrepreneur purchase a pharmaceutical company and raise the price on its AIDS or cancer drugs by 7000%? As a future manager, is this a good thing?

Answer 1

1) Law of demand says that there exist a negative relationship between price and quantity demanded. If I as a manager reduce the price to sell more quantity to your consumers may not be good for firm because there could fall in total revenue from fall in price even if more units are sold. Producers have to estimate that if the demand for their product is elastic, they can reduce the price to raise revenue otherwise total revenue will fall in case of price fall of inelastic good.

2) Demand of flights for consumer going on vacation is elastic where they reduce quantity demanded of it when price rise while demand of flight for business person is inelastic.

3) Demand of AIDS or cancer drugs is inelastic which means consumers will not reduce their demand even if price rises by large. To raise revenue of pharma company, this is a good thing to raise price by 7,000% because this good is necessary for consumers and they cannot reduce its quantity demanded. From the social welfare perspective, it is not a good thing because there would be excess burden on poor people and some of them will loose their lives as they will not be able to pay higher prices.