Question

Explore of each of the questions below and provide your perspective :

1. A company faced by an elastic demand curve will always benefit by decreasing price. True or false? Explain.
2. In 2002 the U.S. Postal Service increased first-class postage rates from 34₵ to 37₵. The service had been losing money. One of the reasons is increased competition from companies such as United Parcel Service and Federal Express. Another reason is the use of faxes and e-mail, as well as electronic bill payment. With this decrease in demand for postal services, why do you think that the Postal Service is seeking a rate increase?

Answer 1

If a company faces elastic demand then the unit % change in Price will have more than a unit % change in demand which reflects that the increase in quantity will be more in percentage term for a percentage decrease in price which represents higher Revenues for decrease in Prices but Profit for the firm will become negative if price falls below the Marginal cost even though revenue increases Hence, statement is False

The reason behind the increase is probably driven by fact that the elasticity of demand for the US Postal services is inelastic which reflects that the decrease in quantity in percentage terms for increase in price is lower resulting into increase in revenues with increase in price. Also, this lower elasticity can be driven by the fact that US postal services is mostly used for official purposes in internal government services.so, eventhoigh the demand is decreasing but the reason is not pricing and instead it could be leveraged to increase revenue and profit