Question

In: Economics

Which of the following companies is most likely to face the most inelastic demand? Shop Rite...

Which of the following companies is most likely to face the most inelastic demand?

Shop Rite supermarket

JC Penney

Best Buy

Con Edison electrical utility

McDonald's

Solutions

Expert Solution

Let me answer the question one by one.

But first it is important to know the meaning of Inelastic demand. It is a situation where the potential buyers demand won't change in the same proportion as the price changes. Say for example, if the price of a commodity is increased by 25%, its demand will be reduced by like 2%. This scenario exists in case of necessities like food, fuel etc. The demand curve will be steeper and the percentage change in quantity demanded is less than the percentage change in price.

Shoprite supermarket

A supermarket generally deals with products that consumers use every single day. No matter in what percentage the price increases, people will buy products like Food, Grocery which are necessities. There exist a situation of inelastic demand as the value of elasticity of demand lies between 0 and 1.

JC Penney

We know that JC Penney is a departmental store chain in USA. However the product line of such stores are generally normal goods and which means the consumption of such good increases as income increases. This is actually not a case of inelastic demand. eD will be equal to 1 and the demand curve will be a downward sloping line from left to right creating 45 degree angles with the axes. It is also known as rectangular hyperbola.

Best Buy

This website is just like amazon dealing with wide varieties of products. But the products offered by them doesn't come in the category of necessities. So the demand is also not inelastic. The products are normal goods, i.e. eD=1.

Con Edison electrical utility

Con Edison deals with electricity supply and we know that there is no home in USA without electricity supply. It is now considered to be a necessity and the demand is inelastic in nature. The value of eD lies between 0 and 1.

McDonald's

McDonald's meals are considered to be a luxury for the low working class consumers while it is inelastic for the high income consumer group, because it is a necessity for them. When there is a change in price of McDonald's meal, the working group cannot afford it; they will go for the products which are its substitutes like burger king that would fulfil their meal needs.

So it is clear that Shop Rite supermarket will face most inelastic demand followed by Con Edison electrical utility, McDonald's, JC Penney, and Best Buy.


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