Question

The economy of a certain country has a labor-intensive manufacturing sector. One of its components is the furniture industry, which has many producers and generates a good return on profits. However, global situations cause operating costs to increase and to a lesser or greater extent affect this industrial sector, which is very competitive. The A&H Furniture company, specialized in rustic furniture, operates in this industry and distributes both for the local and international markets.

Given the increase in operating costs and their effects, A&H Furniture considers the following:

The magnitude of the increase in operating costs over your total income and profit.

The increase in sales prices of its furniture for both local and international distribution.

Adjustments in the processes or functional organization charts that allow savings that offset the increase in operational costs.

The convenience of commercial alliances or subcontracting of professional services.

Your writing must contain at least one (1) introductory paragraph, content development answering the guiding questions and one (1) concluding paragraph that summarizes the most relevant aspects of the content.

Write your essay taking into account the situation provided and the four options presented by A&H Furniture.

Use the following guiding questions to develop your writing:
What kind of demand elasticity price should furniture have? Why?
How does this situation affect your total income and earnings? Explain your answer.
If A&H Furniture decided to increase the price of furniture, how would the quantity demanded and the relationship between price elasticity and total income be affected, keeping everything else constant

Answer 1

Introduction---

This is the case of a monopolistically Competitive furniture market where there are large number of producers selling their furniture a little bit differentiated in regards to price, quality, sizes and shapes.

Global impact and increase in operating cost---

As the operating cost ( variable cost ) has increased ,it has hindwred the profits of the forms.Consequently the total income( revenue) of the firms is adversely affected

Case of A&H Furniture------

The firm need answers to some questions to takle the increasing operating cost---------:

* The price elasticity of demand for the furnitue is elastic.

It means that if the firm tries to increase the price of furniture to meet higher operating cost, it eill loose its demand as ---- greater the elastic demand , the more are price sensitive buyers

* This situation if increase in operating cost eill decrease income and earnings to the firm as the firm cannot afford to loose its buyers by increaasing price of furniture,so price will have to be charged at the same lines

Effect of price raise

* In case price is raised, quantity demanded will decrease as there is inverse relationship between price and quantity demanded

*If price is up, the percentage fall in Quantity demanded will be greater than the percentage rise in price. It is due to price elasticity of demand being greater than one.( Ed>1)

* With price rise total revenue will decrease because as per total expenditure method of price elasticity of demand---------

If demand is elastic,with the increase in price, total revenue will decrease.

Nutshell ( Conclusion) -----

So, we come to the conclusion that it will not be worthwhile for A&H furniture to raise its price to sustain same set of profit and revenue. The firm must tackle the problem of increasing operating cost by opting for better( efficient) utilisation of resources.