Elasticity of Demand

1052 Words May 21st, 2007 5 Pages
In this paper, we examine Happy Pet Clinic, a local veterinary clinic, and how the principles of elasticity of demand might frame its pricing decisions and planning. As a small practice, every change the managers make can have a significant impact on the clinic 's income. Price Elasticity of Demand, Cross Price Elasticity of Demand, and Income Elasticity of Demand concepts can be used to analyze and estimate how prices changes may affect the clinic 's bottom line Professional Vet Brand pet food is the exclusive brand of pet food carried at the Happy Pet Clinic. This pet food is considered a ‘premium ' brand and competes with other high-end pet foods but is available only at veterinary offices. The recent recall in over 100 brands of pet …show more content…
Income Elasticity of Demand deals with the responsiveness of the quantity demanded of a good when the income of the consumer increases. It measures whether a good is a normal or an inferior good. "A product is a normal good when its income elasticity is positive, meaning that higher income causes people to purchase more of the product. For an inferior good, income elasticity is negative because an increase in income causes people to buy less of the product" (Kane, 2007). At Happy Pet Clinic, they want to calculate the income elasticity of their clients willing to do a "Wellness" panel of blood work on their pet if their clients have an increase in income. The elasticity (E) can be calculated in this way: Ei= % change in the quantity demanded, divided by the % change in income.

Therefore, if income elasticity is 1.5, an increase in income by 7% will lead to a 10.5% rise in clients willing to do a Wellness panel blood work on their pet by. This tells us that a wellness panel of blood work is both a normal and a luxury good: A normal good has an income elasticity > 0. An inferior good has an income elasticity < 0 A luxury good has an income elasticity > 1. A necessary good has an

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