Question

abc store management is facing with severe liquidity crisis and contemplating increasing some product (product group A) prices and decreasing price of some other products (product group B). based on your elasticity value of knowledge, discuss the product characteristics that would be included in group A and B.

Answer 1

To tackle the liquidity crisis, the manager needs to increase the revenue, which can be done using price increases or quantity of goods sold increase (by decreasing their prices) or both

Product A - increasing the prices of these products may decrease their demand but if the price elasticity of demand for these products is close to zero or inelastic, then an increase in price won’t dent the sales much, thus, increasing total revenue and hence, liquidity. So products with inelastic demand may include necessities (salt, sugar, soaps etc) and goods having no or less substitutes(food items, personal hygiene items etc)

Product B - decressing the prices of these goods should increase their demand by more that the decrease in price then only total revenue will increase. Such type of goods are price elastic. These goods have properties like durables(AC , fridge, TV etc.), luxury goods, goods having substitutes( particular brand of clothes and shoes etc.)

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