Question

In: Economics

Developing a new product has taken longer and required more work than was expected at the...

Developing a new product has taken longer and required more work than was
expected at the time the decision to develop was first made. Should the firm raise
the price of the product above what it originally planned to sell it for because the
costs are higher than before?

Please justify with relevant economics concepts.

Solutions

Expert Solution

The economic concept in this regard is the price elasticity of demand (PD).

PD = % Change in Quantity demanded / % Change in price

If (PD > 1), the elasticity is more than 1 and price should not be increased, because a little increase in price will pull the demand down very big.

If (PD < 1), the elasticity is less than 1 and price could be increased without fear, because quantity demanded will not be much lower as the price increases. This may increase the total revenue based on the elasticity situation – if the product is perfectly inelastic, a price rise will increase the total revenue surely.

If (PD = 1), the elasticity is unit elastic. A price rise will give an equal amount of fall in total revenue. Therefore, a price rise is possible here since there is no loss no gain.

Since the product is new, knowing the elasticity of the product is very important. This could be done through market study, online research, and market survey. If the price elasticity of demand of the product is elastic (PD > 1), the price of the product should not be increased. Such price could be increased in other two cases.

Rahul Sunny answered 6 months ago
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