The Tariff, the Price Elasticity of Demand and the Impact on Company Profits

The Tariff, the Price Elasticity of Demand and the Impact on Company Profits.

Here is some help with elasticity.

In this week’s discussion your 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 challenge that US Tariffs on Chinese Imports is having on profits.  Please make yourself CEO of only one of these hypothetical companies.

‘Tis the Season- ‘Tis the season is one of the largest importers of holiday decorations and the summer quarter is devoted to importing decorations such as lighting, artificial trees, table runners,  outdoor yard decorations all of which have to be ready to ship by early fall. In fact we at ‘Tis the Season has a highly inelastic supply curve, they ramp up to produce decorations for each season and then once that season has been shipped they move on to the next season.  Fortunately the price elasticity of demand for almost all of your products is 0.19.

We Build Big – We Build Big is one of the largest developers of residential structure in the US.  We Build Big, builds every thing from apartment complexes to new single family homes.  Critical materials such as lumber, gypsum board, fabricate metal etc are largely imported. We Build Big know that our production process, the supply curve, is relatively inelastic. The concern over profits is that the price elasticity of demand for housing is 1.0.

Very Big US Auto – Very Big US Auto is one of the oldest and one of the largest auto manufacturers of auto in the US.  Very Big US Auto’s supply chain is highly dependent components manufactured in China and assembled in the US. Very Big US Auto knows that the price elasticity of supply is relatively inelastic and that then the price elasticity of demand which is1.2.

Now explain:

• Is the demand curve for your product relatively elastic, inelastic or unitary elastic?  Demonstrate for your company’s product, by how much the quantity demanded will change if you pass on the 25% increase in cost from the tariff as a price increase for your product. In other words, show your calculation of the percentage change in the quantity demanded given a 25% change in the price.
• Given your company’s price elasticity of supply and price elasticity of damand prepare a statement for your board as to the potential impact of profits.   Who will pay the the larger share of the tariff, your firm or your customers.

The Tariff, the Price Elasticity of Demand and the Impact on Company Profits

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