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Demand Curve and Elasticity

Key Assignment Final Draft 

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 cook books$2,000
Equipment$4,000
Overhead$1,000

Part I

Deliverable Length: 1 paragraph 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 cookbook will be $30, and the 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.

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SAMPLE ANSWER :

The above graph shows the demand curve for the changing prices of
cookbooks. In case the price of the cookbook is increased then demand shall fall in the proportionate way. The demand curve was driven by equation Q=10000-100P so by changing the values of P from $25 to $35 we get different values of Q which on plotted on curve will yield the above demand curve.
Elasticity of demand (Friedman,1976) is defined as change in price. In the above mentioned case it is -100 which implies that the demand for cookbooks will decrease as the prices are increasing.
Given the conditions of the business and he expected costs associated with the business the business is worth pursuing.

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 that 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 are you thinking about?

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