Relationships Between Substitutions and Compliments
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Relationships Between Substitutions and Compliments
Elasticity is the change and affect that one variable has on another (Colander, 2013). When the price of coffee rises, the demand for tea increases. Price elasticity is the force that determines whether a good is a substitute or a complement. We will examine the relationships between substitutions and compliments in reference to elasticity and their effect on supply & demand in economics. Reflecting on the differences between complementary goods & substitutes, we provide good examples to illustrate the difference between changes in demand vs. changes in quantity demanded.
Supply & demand are the representation of the market for a particular good. Demand is people’s “willingness and ability to pay ”(Colander, 2013) for a good. The price of a good generally guides how much of a demand there will be. The Law of Demand states, quantity demanded rises as price falls, other things constant (Colander, 2013). As the price rises and falls the quantity demanded will also fluctuate to reflect the change. The relationship between price and quantity demanded is an inverse one. People will buy more of a good when it’s price goes down, or will buy less of a good as it price goes up.
Supply is how much of a good is available. The Law of Supply states, quantity supplied rises as price rises, other things constant (Colander, 2013). As the price of a good rises, a firm will try to supply more of that good, or as the price falls, they will supply less. A firm will decide if the price of a good is too low, it will start producing a substitute as a way of making profit. Measuring a good’s elasticity is a very important factor when deciding what to produce.
Elasticity, Elastic and Inelastic Demand and Supply
Elasticity is an important component of economic analysis and firms’ pricing decisions. The most common concept used for analysis is the concept of price elasticity of supply and demand. Elasticity of supply is defined as “the percentage change in quantity supplied divided by the percentage change in price” (Colander, 2013), and elasticity of demand is “the percentage change in quantity demanded divided by the percentage change in price” (Colander, 2013).
Economists classify elasticities by relative responsiveness, where supply & demand are categorized as elastic and inelastic. Supply or demand is viewed as elastic if “the percentage change in quantity is greater than the percentage change in price” (Colander, 2013). On the other hand, supply or demand is inelastic “if the percentage change in quantity is less than the percentage change in price” (Colander, 2013). Thus, the larger the number for price elasticity of demand, the more responsive quantity demanded to price.
Elasticity of substitution shows to what degree two goods or services can be substitutes for one another. The more substitutes a good has, the more elastic is its demand. The elasticity of substitution is most often discussed in the context of production functions, but is also very useful for describing utility functions. A firm uses two inputs (aka factors of production) to produce a single output.
There are four factors that influence the number of substitutes a good has.
- Time period
- Degree in which the good is a luxury
- Market definition, and
- Importance of the good in one’s budget
Put simply, the products that have more substitutions have greater elasticity in supply and demand.
Substitute and complementary products are produced to correlate with consumer demands. Substitute products are those that meet the needs of a consumer as well as another product does, for example Blue Bonnet Butter® versus Shedd’s Spread Butter ®. Although a consumer may have a preference to one, the function of the two products is virtually identical. A complementary product on the other hand, is a good or service that is used with another product, such as hotdogs and hotdog buns. Demand for one product, leads to an increase in the production of complementary products.
If steak is your preferred choice of meat to use in your favorite recipe, you buy it often. However, when you see that the market begins to charge more for steak, you decide to substitute steak for hamburger meat. Hamburger meat is cheaper and your meal tastes just as good. The demand rises for hamburger meat as a direct result of the higher price of steak. You may even substitute any type of meat for steak, such as turkey, chicken, or pork; but none of these items complement each other. They are substitutes for steak.
In comparison, “a complementary good is a good whose use is related to the use of an associated or paired good” (Colander, 2013). If you purchase a computer, you may be more than likely to purchase a printer or software. The printer is needed to print your work you create on the computer and the software aids in the creation of your research papers. The printer and the software are then considered complement goods. You may not have considered purchasing either good if you had not purchased the computer. The demand for printers and software then increases because of the initial or associated purchase of the computer.
Alibaba is amongst the leaders in the provision of online and mobile platforms for trade. It is involved in both retail and wholesale business. This company is also participating in the delivery of cloud computing as well as other services. This company has the mission of easing business transactions around the globe. Alibaba aims at building the future infrastructure of business. This company has experienced tremendous growth since its entry into the market owing to the efficiency of its business transactions. This could be attributed to its organizational structure. This paper seeks to provide an analysis of the organizational structure of Alibaba and offer a prediction of how the organizational structure will affect its organizational performance.
Alibaba has adopted an organizational structure referred to as Strategic Business Units (SBU) structure. In strategic business units, newer units are set up from the main company that operates as independently taking responsibilities for all losses and glory of profits. Success of every unit adds up to that of the main company. SBUs can be the product, market or geographically based. Alibaba operates from three primary sites; taobao, Tmall and Alibaba.com. (Li, 2009).
Faced with the diversity and changing consumer needs and wants, Alibaba found the need to have strategic business units in places like America. The idea to have these independent business units was to ensure that branding of products concurred with the culture and customs of the geographic area. In America, for instance, these units have registered high profits. The advantage of using strategic business units is that a company cushions itself from adverse loss and other failures to launch characteristic of small-scale business. When strategic business units are made geographically, a company can explore newer professional talents from both its home country and the new one (Martinsons, 2008).
The future of this company seems bright owing to the organizational strategy adopted. Responding to the ever-changing customer needs will not be a problem if this trend of strategic business units does not seize. However, this company needs to consider creating more strategic units in other countries and geographic locations. Martin sons (2008) claims that strategic marketing is the future of all the business transactions.
Relationships Between Substitutions and Compliments
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