Question

suppose that you have applied for a job vacancy for the biggest poultry firm in a country. the interview panel asked you to explain the relevance of the price elasticity of demand for the firm. how do you answer

Answer 1

By determining the price elasticity of demand for a product, the price can be altered in order to maximize revenue. Before looking at the price elasticity of demand for the poultry firm, it is important to remember the following rule -

1. When demand is elastic, price and revenue move in the opposite direction. In other words, when demand is elastic, an increase in price will lower revenue and reduction in price will increase revenue.

2. When demand is elastic, price and revenue move in the same direction. In other words, when demand is inelastic, an increase in price will increase revenue and reduction in price will lower revenue.

Just this basic rule is critical and relevant for firms. By judging the price elasticity of demand, the firm can therefore maximize revenue.

Specific to the poultry firm, the price elasticity of demand is "Elastic." The reason are as follows -

1. There are several substitutes to poultry and these include pork, beef, fish and other red meat. Therefore, with higher availability of substitutes, an increase in price can translate into consumers shifting to other options. This makes demand elastic.

2. The barriers to entry in the industry is not very high. This enables several players to compete in the industry. While the biggest poultry firm might have some advantage based on economies of scale, it is not sufficient as there is likely to be significant competition.

Therefore, demand is elastic for the poultry firm and to maximize revenue, the firm can use the strategy to lower price.