In This Week's Discussion You Are Going To Be The CEO Of A C

In This Weeks Discussion You Are Going To Be The Ceo Of A Companyi

In this week's discussion you are going to be the CEO of a company. In anticipation of the upcoming quarterly disclosure of profits, you prepare your Board of Directors for the pressure that cost-push inflation is having on profits. There will be some erosion of profits. Please make yourself CEO of only one of these hypothetical companies.

Profile of the Companies

All America Grocery Inc

We serve communities in the middle of the income market providing low prices for all basic grocery needs. Our modest income consumers expect good deals on quality foods. The COVID-19 pandemic has put upward pressure on the price of everything we sell. We are also experiencing rising costs in every aspect of our operations as we have to allocate extra resources to protect both our employees and the public. The price elasticity of demand for food is 0.20.

Very Big US Auto

Very Big US Auto is one of the oldest and largest manufacturers of automobiles in the US. Our supply chain heavily depends on components manufactured in China and assembled in the US. The Chinese economy has rebounded quickly, but much of the production capacity is still rebuilding inventories, leading to lagging supply and upward pressure on costs. Additionally, we must implement extra safety measures for workers, increasing our operational costs. The demand for our vehicles is relatively elastic with a price elasticity of demand of 1.2.

Big Time Entertainment

Big Time Entertainment is a nationwide provider of movies, arcades, and other in-person entertainment venues such as bowling and roller skating. The COVID-19 pandemic severely impacted our operations. As we reopen, increased regulations have significantly raised our costs for cleaning and safety measures. We face uncertainty due to potential future shutdowns. Customer demand is relatively elastic with a price elasticity of 1.6. Furthermore, we are competing with online entertainment options that are not experiencing the same costs pressures.

For each company, determine whether the demand curve is relatively elastic, inelastic, or unitary elastic. Demonstrate, with calculations, how much the quantity demanded will change if the company passes on a 10% increase in costs, by showing the percentage change in demand. Based on the company's price elasticity and industry environment, prepare a statement for the board regarding the potential impact on profits, and analyze who will bear the larger share of the cost increases—the firm or the customers.

Paper For Above instruction

The impact of cost-push inflation on company profits is deeply intertwined with the price elasticity of demand for a firm's product. Specifically, it influences whether an increase in costs will be absorbed primarily by the company, passed on to consumers, or shared between the two. To understand this dynamic, we analyze each company's demand elasticity and simulate the effect of a 10% cost increase, then discuss the potential profit implications.

All America Grocery Inc

Given that demand elasticity for food at All America Grocery Inc is 0.20, the demand for grocery products in this context is largely inelastic. An inelastic demand signifies that consumers' purchasing behavior does not drastically change with price variations. Mathematically, the percentage change in quantity demanded (ΔQ%) in response to a price change can be calculated using the elasticity of demand (E) as follows:

ΔQ% = E × ΔP%

Plugging in the values:

ΔQ% = 0.20 × 10% = 2%

This indicates that a 10% increase in costs, if fully passed onto consumers, would result in only a 2% decrease in quantity demanded. Since demand remains stable despite price increases, the company could transfer most of the cost increase to consumers with minimal loss in sales volume.

From a profit perspective, this suggests that All America Grocery Inc can absorb a significant portion of the cost increase without substantial reductions in revenue, thereby protecting profit margins. However, since the demand is relatively inelastic, passing all cost increases to consumers might risk alienating price-sensitive segments if prices are raised excessively.

Very Big US Auto

The demand elasticity for automobiles is 1.2, indicating elastic demand. Vehicles are more sensitive to price changes because consumers can delay purchases, seek alternatives, or opt for different transport options if prices rise.

ΔQ% = E × ΔP% = 1.2 × 10% = 12%

Consequently, a 10% cost increase that is fully passed onto customers could lead to a 12% decline in quantity demanded. This significant drop illustrates that consumers are quite responsive to price hikes in automobiles, and passing on costs risks substantial sales losses, eroding revenue and profits.

To remain competitive, Very Big US Auto might choose to absorb part of the increased costs, reducing profit margins, or attempt to limit the pass-through extent, thereby balancing profit preservation with sales volume. Given the high elasticity, it is more advantageous for the company to absorb some costs rather than fully transfer them to consumers.

Big Time Entertainment

The elasticity of demand for Big Time Entertainment is 1.6, indicating highly elastic demand. Entertainment venues are discretionary; patrons can easily forego or substitute activities, especially in a competitive environment with online options, if prices increase.

ΔQ% = E × ΔP% = 1.6 × 10% = 16%

This substantial decline in demand suggests that the company cannot pass on much of the increased costs without risking a severe reduction in attendance and revenues. The company is likely to absorb a larger share of the costs, possibly sacrificing profit margins to maintain patronage and competitive positioning.

Summary and Implications for Profitability

In summary, the degree of demand elasticity critically influences who bears the burden of cost increases. For All America Grocery Inc, with a highly inelastic demand, the company can largely pass costs onto consumers, minimally impacting sales and profits. Conversely, for Very Big US Auto and Big Time Entertainment, with elastic demands, passing on costs would significantly reduce demand, threatening profitability.

Consequently, firms with elastic demand tend to shoulder a greater share of increased costs to avoid loss of sales, while inelastic demand allows companies to transfer most costs to consumers without substantial demand reduction. Strategically, companies like auto manufacturers and entertainment venues might negotiate with suppliers, improve operational efficiencies, or temporarily absorb costs to sustain demand.

In conclusion, just as demand elasticity guides pricing strategies, it also determines how cost-push inflation impacts profitability and who bears the SAS burden. For management, understanding this relationship is pivotal to navigating inflationary pressures effectively, balancing short-term survival with long-term growth.

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