Question

Microeconomy Assignment

We are looking at two businesses, Company A and Company B. Company A lowers its price for a certain product by 6% and sees an increase of about 12% in revenues.

Company B tries a similar move : It lowers its price by 6%, but sees its revenues go down by 3%

Part A : Using the concept of Elasticity, explain what is happening in the case of company A.

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Part B : Using the concept of Elasticity, explain what is happening in the case of company B.

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Part C: What do you think might be the difference between the two companies? Please explain. There are many possible answers to this question, so there i no one correct answer.

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Answer 1

Company A reduces the price of its product and it's revenue increases. The revenue increased because the price elasticity of the companies product is Elastic.

In case of Price Elastic demand Lower the price higher the revenue and higher the price lower the revenue.

In case of company B the revenue decreased with the decrease in price. Thus, it means the price elasticity of demand is inelastic.

Inelastic demand is one in which lower the price lower the revenue. Higher the price higher the revenue.

The main different e between these two companies is Price Elasticity of demand that is Company A - Elastic . Since a lower price leads to Higher revenue.

The elasticity is dependent on the product. Here, company A product is not a necessity therefore a lower price would lead to a larger change in Quantity Demanded. Here, Quantity effect is greater than Price effect.

Company B elasticity is Inrlastic. The revenue declined with the reduction in price of the output. This, generally happens when price elasticity of demand is inelastic.

In case of inelastic demand the price effect is greater than quantity effect.

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