Question

     

SUBJECT: ECONOMICS:

QUESTION ONE:
Explain the type of pricing strategy that you as the manager of a company would implement for Good X and Good Y with the following price elasticity of demand co efficients. Use diagrams to motivate your answer.

a). Good X: 2.3

b). Good Y: 0.6

Answer 1

Rule of Thumb for the Pricing Strategies:

If Demand is Elastic and quantity demanded increases, then decrease the price

If Demand is inelastic and quantity demand falls, then increase the price.

a)

The elasticity of demand for Good X = 2.3. Since, the coefficient is greater than 1, we say that the demand is elastic. In other words, % change in quantity demanded > % change in price.

In such case, the demand curve is flatter as shown in below figure.:

The pricing strategy in such case depends upon change of demand. If demand increases, then the firm should lower its price to increase the Total Revenue and vice-versa.

b)

The elasticity of demand for Good Y = 0.3. Since, the coefficient is less than 1, we say that the demand is INELASTIC. In other words, % change in quantity demanded < % change in price.

In such case, the demand curve is Steeper as shown in below figure.:

The pricing strategy in such a case depends upon change of demand. If demand increases, then the firm should increase its price to increase the Total Revenue and vice-versa.