Hypothetical Business Model

Managerial Economics
Group members

FAHAD ALI MIRZA 121103
FAIZA RIAZ 121107
FAROOQ HAIDER 103119
Purpose Statement
Managers make effective business decisions
Learning the field of managerial economics
(market structur...
Problem statement

Problem statement
Gourmet
chocolate
Market Conditions of Chocolate Industry









Hilal
B.P sweets
Cadbury’s
Kidco
Mayfair
Mitchells
Sweet Hills
SWOT ANALYSIS
Strength
Weakness
Opportunities
Threats
Strong Demand
Levels of Flavor
Preferred in Children
All firms are able to
enter and Exit

Free entry & exit

Non Branded
...
Market Structure:
Monopolistic competition.
Produce differentiated products.
Freedom of entry and exist.
Available substitute

Perk
Jubilee
Dairy milk
Kit Kat
Snickers
Bounty
Mars
Price Comparison

Price
Weight

GOURMET
chocolate
Rs. 15
10 grams

Dairy milk
chocolate
Rs. 17
10 grams
Flavor Comparison
GOURMET chocolate

Cadbury Dairy milk
chocolate

Milky chocolate
Dark chocolate
White chocolate
Wafer ch...
Impact of elasticity!!!
If demand function is;
Q = 40 – 2P
E = -2(15/10).
E = -3
3> 1 in absolute terms
This shows that th...
Cost for the maintenance of Labor and
Equipment

Cost of Labor (variable)
Cost of equipment (fixed)
Wage rate per day = Rs...
Sales per month
Questions???
Question # 1

At what price Gourmet chocolate
should be sold to maximize profit?
Answer!!!
Where MC = MR
Demand function
Q = 40 – 2P
Cost function
C (Q) = 4 +0.1 Q2
TR=P*Q
TR=(20-1/2Q)Q

Q2

TR=20Q-1/2
M...
Question # 2

How does the cost of Dairy milk
chocolate affect sale of Gourmet
chocolate?
Answer!!!
We can use Cross price elasticity in order
to know the effect of prices of Dairy milk
chocolate on the Gourmet c...
Question # 3

If a severe snow storm raises the price
of coca beans, should the Gourmet
sell chocolate and if so, at what ...
Answer!!!
Price and cost

Result

P > ATC

Profit maximization

ATC > P > AVC

Loss minimization

P < AVC

Shutdown point
cont
•
•
•
•
•
•
•
•

C(Q)=4+1.5Q2
Q=40-2P
2P=40-Q
P=20-0.5Q
R=P*Q
R=[20-0.5Q]Q
R=20Q-0.5Q2
cont
•
•
•
•
•
•
•
•
•
•

MR=20-Q
MR=MC
20-Q=3Q
4Q=20
Q=5
P=20-0.5(Q)
P=20-0.5(5)
P=20-2.5
cont
•
•
•
•
•
•
•
•
•

P=17.5
Profit=R-C
Profit=PQ-C
Profit=[1705*5]-[4*1.5(5)2]
Profit=87.5-41.5
Profit=46
 Variable cos...
cont
• AVC= VC/Q
•         =21.5/5
•
=4.3 per unit
Example 
Cost before flood C1 = Rs. 14 (according to the given cost function: C = 4 + 0.1Q2)
Cost after flood C2 = Rs. 154...
Question # 4
Can the Gourmet remain competitive if
an overseas chocolate producer pays
30 percent more for cocoa beans but...
cont
• New entry of firm

• NO competitive 
Answer!!!
Not be more competitive of Gourmet.
Total  variable  cost  of  the  overseas 
company  will  increase  it  will ...
Example 
Gourmet chocolate

Dairy milk chocolate

Labor cost = Rs. 88
Cocoa beans cost = Rs. 100

Labor cost = Rs. 70
Coco...
Conclusion
• At Rs. 15 per 10 gms of chocolate, 
GOURMET chocolate should be sold to 
maximize its profit.
• The cost of c...
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Gourmet Choclate Introduce. Managerial Economics

  1. 1. Hypothetical Business Model Managerial Economics
  2. 2. Group members FAHAD ALI MIRZA 121103 FAIZA RIAZ 121107 FAROOQ HAIDER 103119
  3. 3. Purpose Statement Managers make effective business decisions Learning the field of managerial economics (market structure, pricing strategy and competition ).
  4. 4. Problem statement Problem statement
  5. 5. Gourmet chocolate
  6. 6. Market Conditions of Chocolate Industry        Hilal B.P sweets Cadbury’s Kidco Mayfair Mitchells Sweet Hills
  7. 7. SWOT ANALYSIS Strength Weakness Opportunities Threats
  8. 8. Strong Demand Levels of Flavor Preferred in Children All firms are able to enter and Exit Free entry & exit Non Branded Substitute Market Power everyone Holding Hot temperature Melting Industrial Conditions Taste change Chocolate Variety Richer Chocolate Health Conditions
  9. 9. Market Structure: Monopolistic competition. Produce differentiated products. Freedom of entry and exist.
  10. 10. Available substitute Perk Jubilee Dairy milk Kit Kat Snickers Bounty Mars
  11. 11. Price Comparison Price Weight GOURMET chocolate Rs. 15 10 grams Dairy milk chocolate Rs. 17 10 grams
  12. 12. Flavor Comparison GOURMET chocolate Cadbury Dairy milk chocolate Milky chocolate Dark chocolate White chocolate Wafer chocolate Peanut chocolate Almond chocolate Treat chocolate Mint chocolate Crackers chocolate Peanuts Raisins White Chocolate Bourneville (original) Bourneville Almond Crunchy (original) Crunchy Rocks Dairy Milk Hazelnut Blackcurrant & Vanilla
  13. 13. Impact of elasticity!!! If demand function is; Q = 40 – 2P E = -2(15/10). E = -3 3> 1 in absolute terms This shows that the demand of GOURMET chocolate is highly elastic.
  14. 14. Cost for the maintenance of Labor and Equipment Cost of Labor (variable) Cost of equipment (fixed) Wage rate per day = Rs.333 Wage per labor each month = Rs.10, 000 No. of labor units employed = 16 Total cost of labor per month = Rs. 160,000
  15. 15. Sales per month
  16. 16. Questions???
  17. 17. Question # 1 At what price Gourmet chocolate should be sold to maximize profit?
  18. 18. Answer!!! Where MC = MR Demand function Q = 40 – 2P Cost function C (Q) = 4 +0.1 Q2 TR=P*Q TR=(20-1/2Q)Q Q2 TR=20Q-1/2 MR=20-Q MC=Q MC = MR Q = 20 – Q Q = 10 gms P = Rs. 15 At price of Rs.15 Gourmet can maximize its profit.
  19. 19. Question # 2 How does the cost of Dairy milk chocolate affect sale of Gourmet chocolate?
  20. 20. Answer!!! We can use Cross price elasticity in order to know the effect of prices of Dairy milk chocolate on the Gourmet chocolate demand i.e. E = %∆ Gourmet / %∆ P Cadbury Where; E = 3 10% increase in price of Cadbury milk chocolate causes the increase in quantity demanded of Gourmet chocolate to 30%.
  21. 21. Question # 3 If a severe snow storm raises the price of coca beans, should the Gourmet sell chocolate and if so, at what price?
  22. 22. Answer!!! Price and cost Result P > ATC Profit maximization ATC > P > AVC Loss minimization P < AVC Shutdown point
  23. 23. cont • • • • • • • • C(Q)=4+1.5Q2 Q=40-2P 2P=40-Q P=20-0.5Q R=P*Q R=[20-0.5Q]Q R=20Q-0.5Q2
  24. 24. cont • • • • • • • • • • MR=20-Q MR=MC 20-Q=3Q 4Q=20 Q=5 P=20-0.5(Q) P=20-0.5(5) P=20-2.5
  25. 25. cont • • • • • • • • • P=17.5 Profit=R-C Profit=PQ-C Profit=[1705*5]-[4*1.5(5)2] Profit=87.5-41.5 Profit=46  Variable cost=Total cost-Fixed Cost                      =41.5-20 =21.5
  26. 26. cont • AVC= VC/Q •         =21.5/5 • =4.3 per unit
  27. 27. Example  Cost before flood C1 = Rs. 14 (according to the given cost function: C = 4 + 0.1Q2) Cost after flood C2 = Rs. 154 (according to the new cost function: C = 4 + 1.5Q2) The existing price is Rs.15  The existing revenues are 15 * 10 = Rs.150 New MC = 3Q MR = 16 – Q When MC = MR 3Q = 16 – Q 4Q = 16 Q = 16 / 4 Q = 4 gms P = 20 – 1/2 (4) P = Rs. 18 This shows that the price will increase Rs.3 more than the previous one. Now the revenues are (18 * 4) = Rs.72
  28. 28. Question # 4 Can the Gourmet remain competitive if an overseas chocolate producer pays 30 percent more for cocoa beans but pays 20 percent less for labor?
  29. 29. cont • New entry of firm • NO competitive 
  30. 30. Answer!!! Not be more competitive of Gourmet. Total  variable  cost  of  the  overseas  company  will  increase  it  will  result  in  incase of the price of chocolate
  31. 31. Example  Gourmet chocolate Dairy milk chocolate Labor cost = Rs. 88 Cocoa beans cost = Rs. 100 Labor cost = Rs. 70 Cocoa beans cost = Rs. 130 TC = FC +VC TC = FC +VC TC = 20 + ( 70+130) TC = 20 + 200 TC = 220 TC = 20 + ( 100+88) TC = 20 + 188 TC = 208
  32. 32. Conclusion • At Rs. 15 per 10 gms of chocolate,  GOURMET chocolate should be sold to  maximize its profit. • The cost of cadbury Chocolate affect sale  of Gourmet chocolate i.e. 10% increase in  Cadbury Chocolate causes to increase in  quantity demand of chocolate to 30%

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