Question

After viewing the video clip, Bart Gets an Elephant, consider the relationship between price elasticity of demand and total revenue, and why Homer didn't make the smartest business decision when raising the price of admission. For this week’s discussion question, you should pick two products: one that is relatively price inelastic and another that is relatively price elastic. You can determine a product’s relative price elasticity by considering the Determinants of the Price Elasticity of Demand listed in your textbook. You should begin by defining your product in terms of the determinants and then describe how increases in the price would affect total revenue. Would it make good business sense to be the one producing and selling these products? Why or why not?

Answer 1

Solution:

Relatively Price Elastic Demand : When Relatively small change in Price of a commodity causes relatively large change in Quantity, for example - There are commodities for which a small change in price will drastically reduce the amount of the commodity demanded and vice versa. Ex: Air-travel for vacationers is very sensitive to price change . If there is an increase in the air fare then it lead the vacationer to choose another mode of transportation like car or lead him to postpone the vacation plan for the time being. Thus for a rise in airlines fare for the vacationers we would see a relatively more drastic reduction in demand towards air travel and hencein this situation of high price elasticity of demand.

Relatively Price Inelastic Demand :When Relatively small change in Price of a commodity causes relatively Less change in Quantity, for example demand are utilities, prescription drugs,tobacco products & Gasoline. Despite the movement towards alternative fuels, many people who are dependent upon gasoline in their daily lives and are neither likely nor capable of switching to alternative fuels as a practical substitute.

The Producer should aim at producing products that are of utilities which has relatively inelastic demand since the change in price of commodity leads in lesser change in Quantity demanded. In case the producer produces products which can be substituted ha srelatively elastic demand so the change in price of these commodities would result is higher change in quantity demanded, so there is a risk in fluctuation of quantity demanded. Thus the producer would be more beneficial with producing the goods which have relatively inelastic demand.