Question

Evaluate the elasticity of demand for a car applying a minimum of two elasticity determinants. Does your product likely have an elastic or inelastic demand based upon your evaluation of factors influencing the price elasticity of demand? How will considering these elasticity determinants impact product revenue?

Answer 1

Here we would be considering two determinants for elasticity

First is income proportion: The cost of a car is higher than most of the consumer goods like grocery or clothes. So the consumer would have to divert a larger proportion of income into it. This would mean a higher elasticity. If the consumer is able to have a higher income and could spend a large proportion of income on purchasing automobiles, the consumer would buy it. For a rich consumer, probably a decrease in income would not stop him from demanding a car while for the individual with not a very high income, a reduction in income would mean fulfilling the necessary goods' demand.

2) luxury vs necessity: In most of the cases, the car is a luxury good and hence has an elastic demand. But in some cases for the richer sections of the society, the car is a necessity and hence the purchase of a car or its demand would be inelastic of the price.

3) Availability of substitutes:If the substitutes are available ie the consumer is indifferent between the color and the model of the car, then the demand would be elastic ie if the price of the model would increase , the consumer would shift to another model or brand whereas if the consumer is specific regarding a model, then the shift would not be there and the demand would be inelastic.

In the short run, the demand for cars would be mostly elastic because it could be deferred to in future and since it is a luxury good, it would only be purchased or demanded when the income of the consumer is sufficiently high.

The revenue would be more impacted in case when the demand for car is elastic which is the general case because a small shift in either the income or the price of the car (increase) would have a large impact on the sales of the car and hence the revenue would be impacted . This would also be more when the people are indifferent between the variant of the car.

Another case , which is an unusual one , where the demand is inelastic because car is considered a necessity or only a specific model is preferred , the revenue would be less impacted.

(You can comment for doubts )