Question

• Is the demand curve for your product relatively elastic, inelastic, or unitary elastic? Demonstrate for your company's product, by how much the quantity demanded will change if you pass on a 10% increase in cost. In other words, show your calculation of the percentage change in the quantity demanded given a 10% change in your price. You must provide calculations showing the percentage change in quantity demanded. • Given your company's and the price elasticity of demand and the industry supply/competitive environment you face prepare a statement for your board as to the potential impact on profits. Who will pay the larger share of the cost increases, your firm or your customers?

My Business:

All America Grocery Inc - We serve communities in the middle of the income market providing low prices for all basic grocery needs. Our modest income consumers expect goods deals on good quality foods.  The Covid-19 pandemic has put upward pressure on the price of everything we sell. We have also experience rising cost in every aspect of our operation as we have to put extra resources in to protecting both our employees and the public. We are both fortunate and unfortunate that the price elasticity of demand for food is .20.  

Answer 1

The % change in the price is 10%. The price elasticity of demand (PED) for food is given as 0.20.

We know that Price elasticity of demand (PED) is obtained by dividing the percentage change in the quantity demanded (Q) by the percentage change in the price (P) of a product.

That is,

PED = % change in Q / % change in P.

To find out the % change in the quantity demanded, we need to substitute the value of PED and % change in price in the formula given above.

PED = % change in quantity demanded / 10

Or 0.20 = % change in quantity demanded / 10

Or % change in quantity demanded = 0.20 * 10

Or % change in quantity demanded = 2%

Since the change in the quantity demanded is less than the change in the price, consumers aren't sensitive to prices and will continue to buy goods from the grocery in considerable proportions.The demand curve for the grocery's products is inelastic (PED is less than 1).

As consumers are willing to buy the products even at slightly higher prices, the grocery can easily pass on the burden of the increase in costs to the consumers. They will buy products from the grocery no matter what as the demand is inelastic. The seller can take advantage of the inelasticity of demand to extract profits from the consumers.

By charging a higher price for the products, the seller can make up for the increase in costs and earn profits without requiring to alter the quantity of supply to a large degree.