Price Elasticity of Demand

1113 WordsAug 13, 20075 Pages
Running head: PRICE ELASTICITY OF DEMAND Price Elasticity of Demand Team Paper University of Phoenix Price elasticity of Demand With the objective of increasing the company 's revenue, we have been tasked by Hyundai Motors to determine if the company should increase or decrease the price of its Sport Utility Vehicle (SUV), Santa Fe. We will use the price elasticity of demand concept to determine what actions should be taken. Additionally, we will determine the impact on demand for the Santa Fe if the incomes of Hyundai customers increase by 10 percent. We will use the income elasticity of demand concept to help us determine that impact. Our goal is to help the company determine the best unit price to maximize revenue.…show more content…
Aizcrobe, Starr and Hickman reported in Vehicle Purchases, Leasing, and Replacement Demand, "The share of households having a vehicle tends to rise with income…Higher-income house-holds also tend to have more vehicles than house holds overall." (Aizcorbe, Starr &, Hickman, 2004) Typically, the demand for most products increases as incomes rise. However, a 10% increase in customer income could potentially affect demand for the Hyundai Santa Fe negatively. If the Hyundai customer who gains a 10% increase in income views their Hyundai as an inferior good the demand for the vehicle could decrease. McConnell and Brue indicated in Economics: Principles, Problems and Policies, "Consumers decrease their purchases of inferior goods as incomes rise". (McConnell & Brue, 2004) The consumer could decide to trade in his Hyundai and purchase a Toyota resulting in a decline for demand. Finally, a 10% increase in customer income could have absolutely zero impact on the demand for the Hyundai Santa Fe. It depends on the total net gained by the customer. If the customer only grosses $35,000 annually a $3,500 pay increase will probably not justify the purchase of another Hyundai Santa Fe. On the other hand, if the amount grossed is $115,000 annually and the individual received an $11,500 pay increase, they 're probably driving a Toyota and were never a Hyundai customer to begin with. "Other things equal,
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