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Long Term Investment Decision by a Firm

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The producers of low calorie microwavable food have been expecting a change in price and they want to choose the price strategy which would make their product less elastic and responsive to changes in the prices, then the company should make careful analysis of the entire market situation. The company should look for the substitute goods in the market and their pricing strategy. Higher the number of substitutes are available, higher will be the chance of rise in elasticity of our low calorie microwavable food. The buyers should not have many options to buy from the market. However, if there are only few substitutes available, then the producers may keep the price high in the market of their product. It is also determined by the market power of the producer. Market power is determined by the elasticity of demand of the product. The firm can set higher mark-up over their marginal cost if they know that customers will not shift to another product in case of price increase. Hence, the firm or the producer should consider the cross price elasticity of demand of their product. Another factor to be considered while setting up prices of their product in the market is that of government policies in the economy. Fiscal policy would determine the taxes and other components of aggregate demand. If the firms have set higher taxes, then people would have less disposable income available with them and they would like to spend less on such less calorie microwavable food items because such items are not the necessity for their survival. The in that case, prices should be low in the market so that more people could buy our product and we would be able to earn good amount of total revenue. Moreover, higher sales tax would also reduce the demand of our product in the market. Another factor to be considered by producers to set the prices in…...

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