In calculating the elasticities for each independent variable regarding price of our frozen microwavable food, price of our leading competitor’s product, per capita income of supermarket locations, monthly advertising expenditures, and how many microwaves are sold in the area we can determine if it would be best to increase, decrease, or even that a variable doesn’t have any effect on the quantity demanded. So, first we need to compute the elasticity of each independent variable. When we plug in the given data for the quantity demanded equation we get: QD=-5,200-42(500)+20(600)+5.2(5,500)+0.20(10,000)+0.25(5,000) QD=17,650 Now we can determine each independent variable. So, Price elasticity would be (-42)(500/17650)=-1.19. Price elasticity …show more content…
Looking at price elasticity we see that the absolute value is greater than one. This means that if the company decided to increase the price of the product there would be a decrease in quantity sold. From the data we can conclude that the price elasticity is elastic. “When demand is elastic—that is Ed >;1—a given percentage increase (decrease) in price is more than offset by a larger percentage decrease (increase) in quantity sold” (McGuigan, Moyer, and Harris, 2014). Since, the product is somewhat elastic an increase in price will result in lower quantity …show more content…
“If, however, changes occurred in the other determinants of demand, we would expect to have a shift in the entire demand curve” (McGuigan, Moyer, and Harris, 2014). Some of the changes that would cause the demand curve to shift right would be increase in the purchaser’s income, decrease in price of the competitor’s product, a wave of consumers looking to switch from high-calorie food to low-calorie food could also shift the demand curve. For the demand curve to shift left factors such as an increase in price of our competitor, a decrease in our customer’s income, or a third competitor entering our
Elasticity is the responsiveness of demand or supply to the changes in prices or income. There are various formulas and guidelines to follow when trying to calculate these responses. For instance, when the percentage of change of the quantity demanded is greater then the percentage change in price, the demand is known to be price elastic. On the other hand, if the percentage change in demand is less than then the percentage change in price; Like that of demand, supply works in a similar way. When the percentage change of quantity supplied is greater than the percentage change in price, supply is know to be elastic. When the percentage change of quantity supplied is less then the percentage change in price, then the supply then demand is known to be price inelastic.
5) Time: The elasticity of demand varies with the length of time. In general, demand is more elastic for longer period of time. For instance, if the price of kerosene rises, it may be difficult to substitute it with cooking gas within a very short time. But if sufficient time is given, people will make adjustments and use firewood or cooking gas instead of kerosene.
Given that corresponding changes in price are stated as 100, 200, 300, 400, 500 and 600, and that
4. The elastic is the increase of price of the eggs. Since the price of the eggs had increased, there would be a decrease in demand. The inelastic is the decrease of price of the eggs where buyers will buy more eggs because of price reduction which increases demand. The possible change in the egg producer’s revenue given the price increase that took place in the market will result in a reduction of revenues. Increasing the price of the eggs will result in less sales of the eggs which will decrease revenue of the eggs.
According to the law of demand, as price increases, quantity demanded will decrease. This is due to the income effect. As prices of food increase, the income of these families remains constant --- resulting in fewer items bought with their respective incomes. Further, food for these families has a very inelastic demand as the percent change in quantity demanded is less than the percent change in price, meaning that regardless of the price, quantity demanded will remain constant as food is
Price Elasticity is the measure in responsiveness of consumers to changes in the price of a product or service. The evaluation and consideration of this measure is a useful tool in firms making decisions about pricing and production, and in governments making decisions about revenue and regulation. “Price Elasticity is impacted by measurable factors that allow managers to understand demand and pricing for their product or service; including the availability of substitutes, the consumer budgets for the product or service, and the time period for demand adjustments.” The proper consideration of Price Elasticity allows managers to set pricing such that the effect on Total Revenue is predictable and adjustments to production are timely. The concept of Price Elasticity is employed in the management of commercial firms and government.
All firms in this market work with the same price, which is why a change in price by a firm can cause a drastic change in their profits. Elasticity is the measure of how consumer demand will respond to a price change. Therefore, a perfectly competitive market is highly elastic, because any change in the price will affect the consumer demand for the good or service. Firms will avoid differing their price to other suppliers, because by doing so, costumers can easily take their business to any other firm, selling the same good or service. This type of situation creates a horizontal demand curve in a perfectly competitive market; the price will stay constant therefore the demand will also maintain consistency.
Demand is where the price is not the factor which will shift the demand curve to the left or right. There is no movement along the demand curve as the price remains the same even though there is a shift in demand. Change in demand is represented by the shift of the demand curve.
In the automobile industry, there are factors that cause a shift in the supply and price elasticity of the supply and demand. These factors can cause the supply demand to reduce or raise the demand for the automobiles. One factor to consider is if the price of steel rises. Automobile manufacturers will then produce fewer automobiles at all different price levels and the supply curve will then shift. Another factor to consider is if automobile workers decide to go on strike for higher wages. The company will be forced to pay more for labor to build the same number of automobiles. The supply of these automobiles will decrease. Lastly, another factor that can curve a shift in the supply curve could be if the government imposes a new tax on car manufacturers. In all of those cases, the supply curve will move because the quantity supplied is lower at all price levels.
When demand is elastic as with Coca Cola products price changes affect total revenue. When the price increases revenue decreases and when the price decreases revenue increases. For Coca Cola if they notice a decrease in revenue they would offer products at a discount to increase revenue. They do this quite often with sales such buy 2 20 oz. bottles for $3 instead of the normal $1.89 each price
Figure I I .4 illustrates the effects of an increase in demand. OD is the original demand curve so that the equilibrium price is P and quantity Q is demanded and supplied.
Using the mid-point method, calculate the price elasticity demand for lamb and interpret the value obtained.
Price elasticity plays an important role in the lives of consumers. The price elasticity of demand is the sensitivity of the demand for a product when its price changes (McConnell, Brue, & Flynn, 2009)iv. Cafes like Panera Bread refuses payments from customers and politely asked them instead to “take what you need, and leave your fair share” (Strom & Gay, 2010)v, resulting in more people getting goods like food at a fair price that they are willing to pay. Based on the income elasticity of demand, consumers can get a better and healthier life as they will buy things with better quality as their income rises. People will go to Italiannies for pizza and not to Pizza Hut as Italiannies offers a better, tastier, healthier and wider variety of choices, even when it is more expensive. With cross elasticity of demand, consumers can get the same quality product at a cheaper price as the rivalry between substitute goods will result in price reduction or improved quality. Consumers get to travel by MAS Airlines at a cheaper price as the rivalry between MAS and other airline companies has caused its price reduction (Gunasegaran, 2011)vi. Consumers with a low budget can also buy what they need. Consumers can get more value from a package offer when buying complementary goods as they “go together”, for example: McDonald's McValue Lunch which comprises of a burger, fries, and soft drink, all for only RM5.95 onwards (My Food Fetish, 2009)vii. With this, consumers can get convenience when buying certain products.
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
One method that Toyota can consider is using the price elasticity of demand to determine whether to increase or decrease the sale price of their automobiles. The responsiveness or sensitivity of consumers to a price change is measured by a product's price elasticity of demand (McConnell & Brue, 2004). Market goods can be described as elastic or inelastic goods as change in quantity demanded for that good. If demand is elastic, a decrease in price will increase total revenue. Even though a lower price would generate lower sales revenue per unit, more than enough additional units would be sold to offset lower price (McConnell & Brue, 2004). In a normal market condition, a price increase leads to a decreased demand, and a price decrease leads to increased demand. However, a change in income affecting demand is more complex.