Question

a) What other elasticities of demand are there besides price, income, and cross price? (1mk)
(b) What is the usefulness to the firm of the elasticity of demand over which the firm has control? (2.5 marks)
(C) Why is it essential for the firm to use the elasticity of all the variables included in the demand function? (2.5 marks)

Answer 1

a)

Elasticity of Supply and Advertising Elasticity are the examples of elasticites other than price, income and cross-price. Advertising elasticity is also known as Promotional Elasticity

b)

Elasticity plays a crucial role for the firm in terms of taking future price actions. For example, if the firm has elastic demand, and there is sudden increase in the quantity demanded, then it is suggested that the firm should decrease its price in order to higher revenue.

Similarly, if the firm faces inelastic demand, then fall in the quantity demand would call for increase in the price of the products.

c)

The factors which are involved in the demand function influence the price of the product in the market. It is crucial each and every variable and their impact on the price level. In order to understand a variable, we study its elasticity or the degree of responsiveness towards the price change.

If we study only few variables and ignore others then the Total Revenue would be impacted. The quantity has to be changed as per the individual variable elasticity. That is why it is important for the firm to use the elasticity of all the variables included in the demand function

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