Question

All products have different price demand elasticities. For example, many food items have elastic demand due to the substitutes available. Select a good or service (NOTE: Do not pick a class of goods but a specific good) that has not already been selected by another student and describe in three separate short paragraphs:

First paragraph: The good's or services' price demand elasticity and income elasticity. Discuss which of the elasticity rules you used to determine your answer. Note - do not use actual numbers - just use logic by applying the Determinants of Price Elasticity of Demand on pages 128/9.

Second paragraph: How much control might an organization have over pricing based on a product’s elasticity? Discuss which of the elasticity rules you used to determine your answer.

Third paragraph: What is the supply elasticity of the product? Discuss which of the elasticity rules you used to determine your answer.

Answer 1

Product selected - Toyota car

Price elasticity of Toyota car refers to the change in quantity demanded of Toyota cars when Price of Toyota cars change. Toyota cars have elastic demand. Which means that price elasticity of demand is greater than '1'. This happens because Toyota car has large number of substitutes available in the market and income spent on a Toyota car is high. We already know that higher the number of substitutes available for a commodity and income spent on the commodity,higher the price elasticity of demand for the it. Toyota car also has an income elasticity coefficient above 1 because of the highly positive relationship between growth in income and demand for cars.

Organisation doesn't have much power in taking decision regarding the price of Toyota car. When ever the price is increased it will lead to a more than proportionate Change in quantity demanded, which means that fall in quantity demanded will be greater than the rise in price. Similarly, a small decrease in price will lead to an increase in quantity demanded greater than that .But it will lead to a price war. However manufacturer does possess some authority over price. He will be exercising it under critical conditions. However the option of overidentifying won't be available to him as it will lead to a huge fall in the demand.

Toyota car also has an elastic supply. If the price of Toyota car in increases, a more than proportionate Increase in Supply will take place. Supply is elastic due to the facts like changing production of car doesn't take place in a short time, car is durable good and increasing the Supply of car is a costly matter. We already know the rules like , if a commodity is durable, it has elastic Supply. Similarly if increasing the production is costly, supply is elastic.