Microeconomic Analysis of Supply, Demand and Market equilibrium for Johnson & Johnson Academic Essay

Solution

Supply, Demand and Market equilibrium for Johnson & Johnson

The company I chose for my microeconomics analysis paper is Johnson & Johnson, and the product Band-Aid brand adhesive bandages. The reason I chose to analyze the Band-Aid brand was due to the multitude of items that falls in the Johnson and Johnson brand. Band-Aids are a brand of adhesive bandages distributed by the American Pharmaceutical and Medical-devices comp. Johnson & Johnson (Levine, 2017). To remain contentious in the industry, Johnson & Johnson must retain an inelastic supply curve. Before the discussion of the factors of production, I think it’s important to grasp the vast cost. The production falls into two categories. Fixed costs are costs are expenses that have to be paid by a company, independent of any specific business activities (Keaton, 2019). The cost is put into several things such as rent, utilities and labor. Then there are variable costs, which the cost is related to the business.

Supply, Demand & Market Equilibrium

1. Elasticity:

The Band-Aid is one very important invention that was created worldwide. The Band Aid was invented in 1920 by the Johnson & Johnson company (Levine, 2017). Price elasticity of demand is defined as: “A measure of responsiveness of consumers to a change in a products cost” (Keaton, 2020). When computing the amount of elasticity, consider the Ceteris Parilous assumption. Ceteris Parilous refers to “All other things being equal” (Amadeo, 2019). Since the Band-Aid is a highly found and sought out product in every household, the demand for the Band-Aid is not affected by the change in price. With the many options on the market, with the demand for Band-Aid’s, the brand its self will not affect the change in price, the demand will stay about the same (McCaffrey, 2020). 

The price elasticity demand for Band-Aids is inelastic due to it having such a low elasticity. The price elasticity of demand is inelastic due to the change in percentage price. The percentage price is greater that the percentage change in the demand of quantity. If the change in price dominated, the expenditure and price would go in the same direction (Khan- Price, Elasticity of Demand, 2020).

• Non-price Factors for Demand

There would be several components that would impact the demand for a Band-Aid. A factor that would impact the need for Band-Aids would be if an war, pandemics or an outbreak was to happen. As for products there is a relationship between the consumers need basis to buy and quantity to house in the household or hospitals (Amedeo, 2019). There is also the chance that the consumers who like Johnson and Johnson products, specifically who want all the products listed under the Band-Aid catalog. Those are the ones such as hospitals, physicians care private sectors to spend more on the quality and quantity of the product (Keaton, 2020). Since the Johnson and Johnson brand itself is primarily a higher sought out brand other than its competitors, despite the price of the products there will be a high demand due to the brands loyalty. The consumers who typically purchase Band-Aid products from Johnson and Johnson continue to support. The preferences of consumers are another nonprice factor for the demand. If you go further into non price factor, the demand for the band aids is the taste preference of the consumers. Having a brand loyalty holds huge elements when individuals are choosing the right bandage for their purposes. Consumers and Individuals alike tend to purchase products based on price bracket and needs of the consumer.

• Nonprice Factors for Supply

The nonprice factors that do impact the supply the band aid supply. One nonprice factor that does impact the supply of the product USFDA policies. Since the makings of band aids do fall under the USFDA jurisdictions this could affect supply if the band aids adhesive or padding wasn’t up to each state medical or sanitation coding. If at this point this does occur, then the supply will be lowered than the demand, creating thus a shortage of the product at the time (McCaffrey, 2020). The USFDA has no sanction on the on the supply demand of the band aid product demand. The supply of the product increases because there is an incentive for consumers to purchase the products in demand (McCaffrey,2020). Another nonpice factor that will impact the supply of the band aid is technology. Since Johnson and Johnson is known for the new and improve adhesives and healing products. Johnson and Johnson are widely known for the band aid producing product why not having the first of its competitors in leading adhesive sticking power as well as the first fast healing antiseptic on a healing pad (McCaffrey,2020). The technology used to produce the adhesive products will affect the supply. This is due to the consumer might need less band aids to heal with the improved sticking quality as well as a better antiseptic on the padding area. Since Johnson & Johnson is a leader in the technical aspects of cosmetically healing protection, its in their best interest to continue to research and keep on top of the latest innovations.  

• Industry & Market Equilibrium

Johnson & Johnson are a part of the healthcare industry. For that reason, the band aid is specifically a member of the healthcare company. The market equilibrium of the band aid is considered to be the point where supply and demand intersects (Khan Academy, 2020). Thus, attained the market equilibriums number of consumers are willing to purchase (the supply) equals the mass quantity of different bandages that could be manufactured and marketed to (Keaton, 2020). The independent relationship between the supply and equals the quantity of band aids that has been fabricated and sold to consumers (Keaton, 2020). The independent relationship of the supply and demand is intended to show the ideal price and the ideal quantity within the market. Since the band aid’s price elasticity of demand and their price elasticity of supply is inelastic, it makes it simpler for their market to reach the markets equilibrium price (Khan Academy, 2020). The changes of the supply and demand of a product such as the band aid have the potential to affect the market equilibrium of that product.

• Decision

Based on the changes that were predicted on the effect of changes in the supply and demand on the markets of the equilibrium. There were much more important decisions that were related to the demand and supply that could have made the band aids if I were the CEO of Johnson and Johnson.

• Production & Cost: Inputs & Costs:

            In economics, there are many factors that goes into the production system. These different vast factors, go along with many fixed and variable costs. It also allows a person to analyze the production and also to analyze a conclusion to help in the production of the products. There are a few factors of production, aside there are three main inputs, or 5 production factors. The 5 factors of production are categorized as such: land, labor, physical capital, human capital & entrepreneurship. The first impact is land, the land is where a company is based on and where all of the day to day operations are handled. This can be in a location building from a factory to a farm. With Johnson & Johnson being one of the top producers of Band-Aid (brand), this particular factor would be in the factory (Encyclopedia, 2009). The second input to discuss is the physical capital, this would be described as manufactured goods that will or are used in the production of services and goods (Lewis, 2019). Also, under that umbrella of capital it would show several things that would have been produced. In other words, companies could use to enhance the production of one’s own products. In the circumstances, capital does not include the equity invested into business, homes or cars. In this affect, as this doesn’t have direct connection to the manufacturing product (Lewis, 2019). Human capital is “the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances” (Pettinger, 2019). Labor is defined as an economic group comprising those who do manual labor or work for wages (Webster, 2020). The final is Entrepreneurship An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards. The entrepreneur is commonly seen as an innovator, a source of new ideas, goods, services, and business or procedures (Hayes, 2020). Manufactures need labor to aid in production needs.

• Production and Cost: Analyze the Factors:

True Permanent Fix Cost:

Estimated Band-Aid time =1×15 minutes per day (total 3 hrs.)	$45.00
Estimated permanent repair times = 6 hours	$90.00
Scrap Produced = 2×12 Band-Aid repairs (24 parts)	$120.00
Reduced Production = 5 parts per incident (60 parts)	$300.00
Labor per Band-Aid = 2 maintenance X 15 min (6 man-hours	$150.00
=1 QC inspection per start-up (1-man hr.)	$25.00
Closer to True Down time	$595.00

Unknown (Unknown) “Bandages”. Retrieved May 8, 2020

Scrap produced = 2parts	$10.00
Reduced Production = 20 parts per hour (120 parts)	$600.00
Labor for fix = 2 maintenance x 6 hours (12 man-hours)	$300.00
=1 QC Inspection per start-up (1/4 hr)	$6.25
Closer to True Down Time (TDC) cost of Band-Aid TOTAL	$916.25

  Unknown (Unknown) “Bandages”. Retrieved May 8, 2020

Decisions of production of a firm will give decisions on the technology that is implemented (). The factors of production will be transferred to an output which is Band-Aid. Another production decision that is made is on the cost constraints. The firm can consider how the prices will affect the output. The most important variable will be taken is the marginal cost. Marginal productivity as well as average productivity will decease as a result in the rise of the marginal cost.

• Production and Cost: Decisions:

Hospitals will be a reference, as hospitals are considered one of the leading companies in investing in to Band-Aids. Factors that would affect the usage would be human capital. Due to the influx of hospital usage of bandages. A change in the usage of bandages used by doctors, nurses could change the quantity of bandages acquired. Factors that would impact on the choice of materials which includes the price for the raw material and the environmental factors. The production of bandages is dependent on the materials including: adhesive sheet, fabric or latex and adhesive. Several factors such as the machine production can affect the supply of such materials. If the machine that produces the bandages breaks down it can result in a decrease in the supply of materials that will result in high cost. The factors that would depict the capital includes the factors of interest rates in return could affect the cost of capital. The lack of appropriate skills can impact the company by limiting its production and cost as well as labor cost. Another factor that might affect the labor input is the output prices. An influx in the prices of bandages will raise the price of the marginal product of labor. Also, with the technological changes, the changes might allow employers to replace labor with machines and can reduce the demand for labor. 

1. Determine whether the market structure of the industry in which your chosen company operates is perfectly competitive, monopolistically competitive, oligopolistic, or monopolistic. Justify your response.

With the company of Johnson and Johnson being of a larger company Oligopolistic is how the company operates. Due to the complexity of having more than two major competitors there is an incredible amount of product differentiation. If you take a glance at the prices of J&J products and compare them with many of today’s competitors you can conclude that they aren’t mainly competing through price or product. There is a massive amount of advertising from J&J also they are a huge conglomerate with many divisions. J&J also does competitions and specials offers on J&J products out there. They have promotions and giveaways, which aren’t so evident in monopolies. With that being said, monopoly power is simply J&J’s leverage over any transaction, as well as negative power over possible transactions.

• Assess how the type of market structure impacts your chosen company’s financial performance as measured by performance variables over the past three years. Support your response with data and graphs illustrating two performance variables of your choosing (e.g., sales, net income, stock price) over time.

The major impact of market structure ‘monopolistically competitive’ on band aids is that it will function much more efficiently as compared to perfectly competitive market. In monopolistically competitive market, the firms in the J&J band aid brands will supply goods or services below to their manufacturing capacity. With trying not to take away the fact that firms’ profit lets it maximize in the different levels, happening to be at the point where the marginal revenue is equal to marginal costs.

• Answer the following question: How would possible changes in the industry’s market structure impact your chosen company’s business strategy in the future? Keep your company’s current business strategy in mind in your response.

Based on the key components it can be shown that this company operates in an oligopolistic market. If there were any changes in the industry’s market structure as if it switches from oligopolistic to monopolistic competition, then you will look at the company to be forced to shift its current strategy of differentiation. This shift would actually adopt a cost-leadership business since in that it would maintain its competitiveness in the marketplaces (economicshelp, 2017). Cost-business strategy would be helpful in the future due to it will produce increased sales and revenue for the Band-Aid Brand. It hasn’t been set that this would bring a change in the business strategy. The only thing that would possibly keep them at the top is identifying modern technology to advance J&J forward in a pursuit to compete and stay at the top of the market. If in the event it doesn’t pan out, then they would experience a short fall which would in turn affect company sales thus affecting revenue.

Reference:

1. Unknown (Unknown) “Bandages”. Retrieved May 8, 2020 https://downtimecentral.com/Band_Aids.shtmlu
2. Webster Dictionary, (May 9^th, 2020) “Labor”. Retrieved May 9^th, 2020 from
3. https://www.merriam-webster.com/dictionary/labor

• Kenton, Will (July 5, 2019) “What is a fixed Cost”. Retrieved May 7, 2020 from https://www.investopedia.com/terms/f/fixedcost.asp

4. Pettinger, Tejvan (September 22, 2019) “Human Capital definition and importance” Retrieved May 8^th, 2020 fromhttps://www.economicshelp.org/blog/26076/economics/human-capital-definition-and-importance/

5.  Hayes, Adam (January 28, 2020) “What Is an Entrepreneur” Retrieved May 7, 2020 from https://www.investopedia.com/terms/e/entrepreneur.asp

Resources:

• Amadeo, Kimberly (July 10, 2019) “Ceteris Paribus”. Retrieved April 21, 2020 from http://www.thebalance.com/ceteris-paribus-definition-pronciciation-and-examples-3305723
• Keaton, Will (2020, Feb 28) “Price Elasticity of Demand”. Retrieved April 21, 2020, from http://www.invetopedia.com/terms/d/demand-elasticity.asp
• Khan Academy (2020). “Price Elasticity of Demand and Price Elasticity of Supply”. http://khanacademy.org/economics-finacnce-domainea/microecomics/elasticityof-demand-and-price-elasticity-of-supply-cnx
• Levine, Hallie (2017, April 9) “History of BandAids” Retrieved  April 25 2020, https://www.jnj.com/our-heritage/18-facts-about-the-history-of-band-aid-brand-adhesive-bandages
• McCaffrey. M (2020, April 24) “Distinct Innovation Model Sets”. Retrieved April 23, 2020, from https://www.jnj.com/our-company/distinct-innovation-model-sets-johnson-johnson-apart
• The Editors of Encyclopedia Britannica (March 30, 2009) “Land” Retrieved May 10, 2020 from https://www.britannica.com/topic/land-economics
• Lewis, C. Paul (October 09, 2019) “Physical Capital” Retrieved May 9,2020 from https://www.britannica.com/topic/physical-capital
• Tejvan Pettinger (2017, May 20) “MacroEconomics”  Retrieved May 24, 2020 from https://www.economicshelp.org/microessays/markets/oligopoly/