Effectiveness of Production by a Country-Free-Sample for Students

Questions: 1.As a producer, why is it important to consider the Price elasticity of demand of your product when setting the price you are going to charge? 2.Explain the difference between Comparative advantage an absolute advantage. Answers: Introduction: This is the report that discusses about the price elasticity of demand and its effect on the pricing decision taken by producers. The next art of the report is about the two types of advantages that is comparative and absolute, differences of these advantages helps in determining the effectiveness of production by a country or producer 1.Price elasticity of demand can be defined as the measure of quantity demanded in terms of the change in its price. In other words, it can be said as the change in percentage of the quantity demanded in response to the change in percentage of the price. In this case all other elements remain constant (Yu, Yang Rahardja, 2012). The law of demand suggest that the price and the demand of the products are always in inverse relationship with each other. The concept of price elasticity of demand is very important to be considered at the time of making price decisions for the products. All the businesses and the producers take into account the elasticity of demand when the prices of the products are decided. This is because the demand gets affected if the price of the product changes (Thimmapuram, Kim, Botterud Nam, 2010). If there is rise in price of the products by the firm then it affects the consumer expenditure on this product and ultimately the revenue of the company. If the demand is elastic in nature then any alteration to the price such as rise in price results in fall of demand and the revenue. If the demand is inelastic then the rise in price will raise the revenue of the company as well. 2.The absolute advantage is the concept that deals with the capability of the company or the producer to produce efficient and good quality goods with least of the resources as compared to other producer or company. On the other hand, the comparative advantage deals with the ability of the producer or the country to produce a product efficiently with lower opportunity cost (Bernard, Redding Schott, 2007). Absolute advantage is about comparing the efficiency of productivity of different companies while comparative advantage is about the loss of opportunity cost. The countries or producer can said to have absolute advantage in producing all the products. However, at the same time different countries or producers can have different comparative advantage. The countries with different comparative advantages can trade with each other that result in each others benefits. Both these concepts are very important for international trade between the countries. As per the discussion it has been analysed that the absolute advantage does not includes cost measure in it and comparative advantage considers the aspect of cost as well (Schumacher, 2012). Thus measuring both advantages is necessary to determine the measure of productivity and effectiveness of the producers or the country. Any of the country or the producer can have the absolute advantage in producing all the goods but it is not possible for the country or a producer to have comparative advantage in producing all the goods. But these advantages needs to measure in order to determine the total effectiveness of the producer or the country over the other country or producer. Conclusion: It has been concluded from the report that change in percentage of the quantity demanded in response to the change in percentage of the price is called price elasticity of demand. The producers take this concept into consideration at the time of pricing because demands get affected by the change in prices. Absolute advantage is about comparing the efficiency of productivity of different companies while comparative advantage is about the loss of opportunity cost. References: Bernard, A. B., Redding, S. J., Schott, P. K. (2007). Comparative advantage and heterogeneous firms.The Review of Economic Studies,74(1), 31-66. Schumacher, R. (2012). Adam Smith's theory of absolute advantage and the use of doxography in the history of economics.Erasmus Journal for Philosophy and Economics,5(2), 54-80. Thimmapuram, P. R., Kim, J., Botterud, A., Nam, Y. (2010, January). Modeling and simulation of price elasticity of demand using an agent-based model. InInnovative Smart Grid Technologies (ISGT), 2010(pp. 1-8). IEEE. Yu, R., Yang, W., Rahardja, S. (2012). A statistical demand-price model with its application in optimal real-time price.IEEE Transactions on Smart Grid,3(4), 1734-1742.