The Price Elasticity Of Demand

1180 Words Nov 11th, 2014 5 Pages
Assignment 2
Operations Decision
Mitchell White
Economics
Dr. Obi

In the demand analysis for the product of this particular firm, we have found that the price elasticity of demand is 1.2. This implies that with a 1% rise in price, quantity demanded falls by 1.2%. Therefore, the expenditure on the good remains almost the same. The firm cannot hope to increase market share by decreasing the price. The revenue earned by the firm will remain the same whether it increases or decreases the price as the demand is almost unitary elastic. There is a fair amount of competition. The elasticity with respect to the price of the close competitor’s product is 0.68. This is less than one. With 1% increase in price of the competitor’s product, there is a 0.68% (<1%) increase in demand for the incumbent’s product. That means the demand for the product is not very sensitive to change in the price of the close substitute. This interpretation of the cross elasticity points to the existence of significant differentiation in the product. Even with a fall in the price of the close competitor’s product, the demand does not fall to a large extent. The two elasticities point to the fact that there is a preference for the firm’s product. The discussion above suggests that the market is characterized by monopolistic competition. There is limited scope for price competition. The firms mainly compete through advertisements and product-differentiation.
The scenario we are dealing with…
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