ECONOMIC FOR MANAGERS

Lecturer : Prof. Dr. Sjafrijal, SE, MA

ARRANGED BY:
RAHMAHTIKA

S2 MASTER OF MANAGEMENT
FACULTY OF ECONOMIC
UNIVERSITAS ANDALAS
2021
Problem and Applications

11. You are the manager of a midsized company that assembles personal computers. You
purchase most components—such as random access memory (RAM)—in a
competitive market. Based on your marketing research, consumers earning over
$80,000 purchase 1.5 times more RAM than consumers with lower incomes. One
morning, you pick up a copy of The Wall Street Journal and read an article indicating
that input components for RAM are expected to rise in price, forcing manufacturers to
produce RAM at a higher unit cost. Based on this information, what can you expect to
happen to the price you pay for random access memory? Would your answer change
if, in addition to this change in RAM input prices, the article indicated that consumer
incomes are expected to fall over the next two years as the economy dips into
recession? Explain. (LO1, LO3, LO5)

Answer :

In this case, the price of the RAM can rise because cost increase, assume the news of
the Wall Street Journal, people with earning lower $80,000 they won't buy RAM
because is too expensive, and people with over these earnings will buy less RAM, in
addition, the incomes will fall, and the demand of RAM will fall too, but for the same
reason the price could fall for the poor demand.

If the cost of input increases in the market, the price of RAM will also increase. This
increase in the price of RAM will shift the supply curve to left. This leftward shift in
the RAM's supply will cause the price of RAM to rise as compared to the earlier one.

Due to the reduction in income of the consumer purchasing power will reduce. As less
disposable income is available with the consumer to spend, he/she will demand less of
the product forcing the demand curve to shift leftward and compelling the price to
fall.

Since the company is a mid sized company, with the increase in the price of the inputs
of the RAM, the price of the RAM will definitely increase.

Explanation:

1) Since the price of the inputs of a particular good are one of the most important
factors which determine the price of the goods, so with the increase in the inputs of
the price of the inputs of the good, the price of the good will increase.

2) With the fall in the income of the consumer, the expenditure of the consumer will
also decrease. So the demand of the RAM will fall because of two reasons increase in
the price of RAM and with the fall in the income of the consumer.
Based on the information given, a general equation can be derived as below: Let Cg
be the purchase of consumer with income greater than $80000 and Cl be the consumer
with income less than $80000, and R be the quantity of RAM. Cg – Cl = 1.5 R As per
the article, the Ram will be produced at a higher unit price, but the article doesn’t state
whether selling price of RAM will increase or not. The RAM producers may continue
working with a lower profit margin in order to gain more market share. So, it cannot
be concluded about the price change based on this information. As the quantity of
RAM purchased is dependent on number of consumers with certain income, the dip in
salary will result in lesser number of consumers in bracket with salary more than
$80000. That means, as per the Law of Demand there will be lesser demand for RAM,
which will further result in increase of selling price of RAM as sellers will look
forward to earn profit by raising the price.