Demand curve graph
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You are starting your own Internet business. You decide to form a company that will sell cookbooks online. Justcookbooks.com is scheduled to launch 6 months from today. You estimate that the annual cost of this business will be as follows:
Technology (Web design and maintenance) $5,000
Postage and handling $1,000
Miscellaneous $3,000
Inventory of cookbooks $2,000
Equipment $4,000
Overhead $1,000
Part I
Deliverable Length: 1 graph plus calculations
You must give up your full-time job, which paid $50,000 per year, and you worked part-time for half of the year.
The average retail price of the cookbooks will be $30, and their average cost will be $20.
Assume that the equation for demand is Q = 10,000 - 9,000P, where
Q = the number of cookbooks sold per month
P = the retail price of books.
Show what the demand curve would look like if you sold the books between $25 and $35.
Part II
Deliverable Length: 1,000-1,500 words
Address the following questions:
1. What is the elasticity of the demand for cookbooks bought this way?
2. Is the business worth pursuing so far?
3. Why or why not?
4. Suppose that you expect to sell about 22,000 cookbooks per month online, and assume your overhead, technology, and equipment costs are fixed. What are your total costs?
5. What are your marginal costs?
6. What are the implications of operating in the short run and the long run?
7. As your business grows, how must you consider the issues regarding diminishing marginal returns and economies of scale?
8. What market structure have you entered, and why?
9. What can you do to guarantee success in this market?
10. Can you use price discrimination in this business?
11. What pricing strategy might you use?
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Solution Summary
The demand curve graphs are examined. The expert estimates the annual cost of businesses. The elasticity of the demand for cookbooks are determined.
Solution Preview
Please see the attached file for the tutorial.
Part II
Deliverable Length: 1,000-1,500 words
Please see below my discussion on how you can come up with your 1,000-1,500 words report for the demand curve.
1. What is the elasticity of the demand for cookbooks bought this way?
Elasticity of demand is an economic tool which is used to measure the responsiveness of the quantity demanded of a good or even service relative to the changes in price of that good or service.
Generally, when the price of a good increases, it follows that the quantity demanded will decrease. This is true as well for the internet service selling cookbooks without us even computing for the actual elasticity. The formula is
Elasticity of demand = Change in quantity/Change in price
For this business, we can use the $25 and $35 price points. Hence elasticity of demand is
Elasticity of demand = [(-305,000—215,000)/-215,000]/[(35-25)/25] = -9,000 = 1.05
This means that for the cookbook, an increase in price will result to a decrease in demand.
2. Is the business worth pursuing so far?
3. Why or why not?
To be able to assess whether the business is worth pursuing so far, we need to look at the income you're giving up which is equal to your annual salary of $50,000 and your income from doing this business.
In computing expected income, I will use $25 as the price ...
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