Question

You manage a department in a large firm. Management follows a standard 100% markup over the wholesale price it pays for all items in the store. (So if the store pays a wholesale price of $50 for an item, it sets its retail price at $100.) In your experience, the elasticity of demand is in the neighborhood of -3. Is top management’s pricing strategy appropriate?

Answer 1

Firstly, kets talk about what elasti iptybof demand means. The price elasticity of demand means the responsiveness or the change in quantity demanded due to 1 unit or 1 percentage change in its price. This means that if the price of a commodity increases by $1, then by how much units, its demand would fall.

In the given case where the markup price is 100% and still the elasticity is around -3 which implies that the demand of the commodity is too sensitive as it is highly and greater than unitary elastic conditions. If a change in price by $1 can change the quantity demanded by 3 units, then the management can't ignore the customers by pretending to be a monopoly firm. The elasticy -3 implies that there are many other close substitutes available for the commodity. So, if the consumers would feel the price to be too high they would not take too long to switch to its other substitutes. Due to this, I believe that it is not an appropriate pricing strategy by the top management as t can clearly reduce its profits by little bit and can make its consumers to stick to their firm. The given strategy would be suitable for monopoly-like conditions with the price elasticity of demand to be perfectly inelastic or lesser elastic.