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Economics Principle Analysis (EPA)

Student’s Name

Institutional Affiliation

Date
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Question One - Demand for Levi’s Jeans

Part A

Levi remains as the brand power that has not been swept away creative destruction forces

through digital transformation. Levi’s recognized the benefits of digitalization and adapted by

promoting its online presence and investing in e-commerce platforms, leveraged social media

and data analytics to understand customer behavior and preferences. The Levi’s app has

contributed to the organization’s growth plans with the digital platform adding new foreign

markets including India, Russia and China (Pymnts, 2022). E-commerce with attributes such as a

virtual stylist that helps customers give the perfect pain of jeans has helped them stand out in the

market (ET Online, 2023). The sales from the direct-to-customer (DTC) channels and e-

commerce accounted for 42% of the overall first-quarter income (Choudhary, 2023). Levi

expanded its online sales platform, ensuring seamless shopping experience for the customers

across different devices. Using data analytics, they personalized customer engagement and

marketing strategies. Integrating technology into their business strategy increased sales,

enhanced customer engagement and allowed the company to adapt promptly to changing market

trends promoting resilience against creative destruction.

Diversification and innovation has also contributed to Levi’s dominance in the market.

Levi’s has diversified by expanding beyond one range to include women’s clothing and not just

men’s clothing. They have introduced new designs and materials to cater to the evolving

customer preferences and taste, leveraging technology for customized fittings and experimenting

with different styles that appeal to the younger generation. Levi is consumer focused and can

provide the customers with what they are looking for with a robust store assortment. For

instance, Gen Z and millennial consumers were in thrift stores looking for vintage Levi’s,
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prompting the company to open a secondhand shop in 2020 (Hartmans, 2022). Expanding the

business to include active wear and loungewear with acquisition of Beyond Yoga. As a

sustainability-based organization, it has in recent years worked towards becoming a net-zero

emissions brand by 2050. With the business aligning its strategy with customer needs,

diversifying the product range and commitment towards sustainability efforts, Levi’s has

remained relevant, attracting new customers and retaining its loyal consumers. Levi’s success

has been associated with proactive initiatives that has ensured they remain competitive evolving

fashion industry.

Part B
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Price Elasticity of Demand (PED) Curve

120

100

80
Price (P)

60
Q1
P2
40
2
20

0
0 5 10 15 20 25
Demand (Q)

Figure 1: PED Curve

Given the price increase from $200 to $205 and based on the assumption that quantity demanded

reduced to 950 units due to the increase in prices. PED calculation;

PED = % change in quantity demanded / % change in price

The % changes in price:

NP –IP/IP * 100

205-100/100 *100 = 5% increase in prices

Initial quantity demanded

1000-950/1000*100 = 5% decrease in quantity demanded

PED = -5/5 = -1
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The negative result represents the inverse association between quantity demanded and the price.

The value of PED being greater than one (-1) demonstrates that the 501 jeans have a relatively

elastic demand. With revenue, changes in price and quantity demanded will affect total revenue.

When the demand is elastic, price increase causes a decrease in total revenue.

Part C

Initial Price of the 502 jeans = $70

New Price = $60

Hypothetical quantities to demonstrate the change in demand:

Initial Quantity demanded – 1,800 units

New Quantity Demanded – 2,000 units

Using PED:

PED = %change in quantity demanded/%change in price

Percentage changes in prices

60-70/70 *100 = -14.29 decrease in price

Percentage change in quantity demanded:

2000-1800/1800 *100 = 11.11% increase in quantity demanded

PED = 11.11/-14.29% = - 0.77

In this case, the negative sign is symbolic of the inverse relationship between quantity demanded

and price. Notably, the absolute values of PED is less than one (-0.77) indicating the 502 jeans
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have a relatively inelastic demand among the price sensitive consumers. When the demand is

inelastic a reduction in price causes a smaller increase in the quantity demanded. The increase in

quantities sold due to the price reduction will not compensate the lower price, resulting in

decrease in total revenues.

Despite the increase in the quantity demanded due based on the price drop, the price reduction

would result in a decrease of the overall review for the 502 jeans sales among this consumer

group.

Part 2

Monopoly Pricing Strategies

Producer surplus is the money Johnson and Johnson makes from selling the drug. With

the reduction in prices from $46 to $8 per month, the company will make less money from each

unity sold. Nonetheless, if more people buy the drug due to its affordability, Johnson and

Johnson might sell more and make up for the lower pricing. Markup is the difference between

what it cost the company to make bedaquiline and how much they are selling it. Therefore, the

reduction in price means that they will be making less extra money on each sale. They will likely

not earn as much as they did before the price drop. Next, consumer surplus is the difference

between how much customers are willing to pay for the drug and what they are actually paying.

Basically, it is the customer bonus. With the much lower price, consumers are saving more when

they buy the drug. This means that they can save their money while getting the medication they

need. Finally, output is how much of the drug the company makes. With the price drop, Johnson

and Johnson will have to produce more bedaquiline since the demand is higher now that it is

affordable. Therefore, they will likely produce and sell more of the drug to increase their profits.
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In summary, with the price reduction, Johnson and Johnson will make less money for each unit

of bedaquiline sold. However, if more customers buy it since it is affordable; they could sell a lot

more units. Consumers will benefit from affordable access to this medication promoting better

access to treatment. To ensure they can meet the demand for the drug, Johnson and Johnson will

need to make more of it.

Isoprofit Curve

ISO Profit Curve

90

80

70

60

50
Price (P)

40

30

20

10

0
0 2 4 6 8 10 12 14 16 18

Demand Q

Figure 2: Isoprofit Curve

With the profit maximizing price = $46

Assumptions:

Cost = 40Q ; where Q is the quantity produced

Demand function;
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P = -2Q + 100

Where P is the price and Q is quantity demanded

Profit function;

Profit = Total Revenue – Total Cost

Profit = P*Q-Cost

With the profit maximizing price of $46, the corresponding quantity demanded using the demand

function;

46 = -2Q + 100

2Q = 100 -46

Q = 100-46/2

Q = 27

Thus, at profit maximizing price of $46, the quantity demanded is 27 units

Calculation of the profit at this price and quantity

Total Cost = 40Q = 40 *27 = 1080

Total Revenue = P * Q = 46 *27 = 1242

Profit = Total Revenue – TC = 1242 -1080 = 162

Calculation of the isoprofit for prices greater than $10 but less than $40:

For any price between $10 and $40, we use the demand function P = -2Q + 100

Assumption: P = $20
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20 = -2Q +100

2Q= 100-20

Q = 100-20/2

Q = 40

To Calculate the profit at this price and quantity

Total Cost = 40Q = 40*40 = 1600

Total Revenue = P * Q = 20*40 = 800

Profit = Total Revenue – Total Cost = 1600 -800 = 800

References

Choudhary, Vidhi (2023) “Levi’s DTC sales were a bright spot in its first-quarter earnings”,

Modern Retail, 6th April, available https://www.modernretail.co/operations/levis-dtc-

sales-were-a-bright-spot-in-its-first-quarter-earnings/
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ET Online (2023) “150 years of Levi’s 501: How the brand managed not to fade away”, The

Economic Times, 12th June, available: Levi's 501: 150 years of Levi's 501: How the brand

managed not to fade away - The Economic Times (indiatimes.com)

Hartmans, A. (2022, November 22). Levi’s got its start making clothes for Cowboys - now it’s a

gen Z status symbol. here’s how the 169-year-old retailer became the world’s most iconic

Denim Company. Business Insider. https://africa.businessinsider.com/retail/levis-got-its-

start-making-clothes-for-cowboys-now-its-a-gen-z-status-symbol-heres/pekk0hv

Pymnts (2022). “Levi’s Flexes Brand Power Pricing Muscles Touts D2C Success of Next-Gen

Stores”, Pymnts, 7th April, available https://pymnts.com/news/retail/2022/levis-flexes-

brand-power-pricing-muscles-touts-d2c-success-of-next-gen-stores/