Question

1. How are the concepts of Price elasticity of Demand relevant to your personal endeavors?

2. Also, include the determinants of Elasticity in your discussion.

3. Assuming you are a business owner, how would you use the price elasticity for your products or service to set the price and determine total revenue. Note: Consider Elastic, Inelastic and Unitary Elastic demand in your explanations.

Answer 1

Introduction: -

Demand for a good is the amount for which customers are willing to pay a price to purchase and avail the same. In economics, it is important to know that the demand for a commodity is inversely related to price in most normal cases.

This means, that as the price of the commodity increases, the demand for the same decreases and vice versa. This happens because the ability of people to purchase the product reduces and they may switch over to other products which may offer slightly altered satisfaction levels.

The degree of elasticity which is the amount of change in demand for a good with reference to its price or other similar variables such as price of related commodities varies from product to product and is dependent on numerous factors such as availability and product characteristics.

Case Specifics: -

Answer to Question 1)

As an economics student, being aware of price elasticity means that we know that as the price of a good increases, the demand for the same decreases and on the contrary when price contracts demand increases. This happens as a result of the ability of people to be able to buy additional units or the need for reduction of demand.

For example, when we have a budget of 10$ to purchase an item and its price rises to 12$ our demand would contract to 0 because our budget is 10$ only. On the contrary if the price were to drop to 5$ we could purchase 2 units of the same product.

Therefore, price elasticity helps in deciding the optimum quantity which we should purchase in our budget and the correct time in which we should purchase the item also.

If what we demand for is inelastic it would mean that we would need to accumulate more funds to purchase the item. However, if there was some room for elasticity, we could wait for prices to fall and correct as per the demand respectively.

Thus, elasticity of demand is an important element of consumer decision making and setting budgets on what to buy and in what quantity respectively.

Answer to Question 2)

Other determinants of Price Elasticity include taste and preferences of the consumers as well as price of substitute goods or complimentary goods respectively. These are important for our personal endeavours also.

For example, if we were tight on budget, understanding the concepts of price elasticity would allow us to allocate our budget in a manner that we could choose from the various alternatives available in the market place if any.

If we were expecting a price rise, we could expedite our buying behaviour and accordingly we could end up paying an appropriate price for the product.

Therefore, a knowledge of other factors helps us in deciding the correct time at which a product should be purchased as well as the similar products which we could buy.

Answer 3)

As a business owner, having an understanding of elasticity can greatly help us in maximizing our revenue and making sure that our products are fairly priced in comparison to our competition. The various types of elasticity and how to set price and avail revenue are as described.

1) Elastic Demand: -

When price is elastic it means that it changes with respect to price or demand for substitutes or complementary goods respectively. In such a situation, it becomes important for business owners to review the prices of competitors and to alter prices accordingly.

If possible, reduce the prices when compared to the competition by a margin. This will add additional customers and help in increasing sales for the company.

For example, companies such as Walmart have used this strategy in which they reduce the price of goods when compared to competitors. This allows them to have maximum number of customers and earn more profits.

2) Inelastic Demand: -

Inelastic demand refers to one which does not change with price or is not affected by substitutes or complementary products which mean they are not affected by goods that can be sold as a replacement, nor are they effected by those products which sell together with one another.

These products can be placed differently and can be sold on a premium and this will allow companies to earn super normal profits.

For example luxury companies such as Rolex and others produce premium quality watches which are sold on quality and not on price demand is relatively inelastic and increasing prices would not hurt the company too much as the customers are willing to pay for an experience and a product than focus on the price of the product. It is targeted at the wealthiest people.

3) Unitary Elastic: -

Unitary elastic would mean a similar change in price and demand. When this happens revenue maximization can happen in the same case as in case of elastic demand however setting a price would be relatively easier. This is because if we reduced prices by 2%, we would know that demand would increase 2% which is not the case with Elastic demand.

Please feel free to ask your doubts in the comments section.