Why Businessmen Raise Prices When Facing Inelastic Demand Essay

The elasticity of demand measures the buyer’s reaction to price as its changing. “Economists measure the degree to which demand is price elastic or inelastic with the coefficient E d, defined as E d = percentage change in quantity demanded of product X/ percentage change in price of product X” (McConnell, C. 2011). Therefore, Ed=∆Qd/∆Pd. When elasticity of demand is measured less than one, demand is considered to be inelastic. The coefficient in an inelastic range is less than one. When this takes place the percentage change in price is more than the percentage change in quantity. It can be said that when inelastic demand is present that quantity becomes less effected by price changing.

b. EXPLAIN how the total revenue test can be used to determine if a demand curve is elastic or inelastic. Use two graphs with numerical examples in your response. ( ____/5)

14. When the price increases from $4 to $6 and the quantity demanded decreases by 2 units, the price elasticity of demand is

| Yes, demand elastic is in the $6 - $10 price range or less than 1. Ed = 0.75 in the $3 - $6 range the range of demand would change by 20 percent if the price changed by 20 percent. If price fell from $15 - $10 TR would decrease.

Q9: (a) A book salesman declares, “When the unit price is $5, I can sell 100 books; when the unit price is $6, I can only sell 90 books.” Given the information, please determine whether the demand on book is elastic or not. (5%)

True, in this case, the price is inelastic, this implies that the price does not have any effect on the quantity demanded.

II. When price falls from 4 pounds to 3 pounds the demand for travel increases to 80,000 units- At the original market price of 4 pounds the demand for travel was 60,000 units generating revenue of 240,000 pounds. When the price is reduced to 3 pounds the resulting demand is 80,000 units and this also generates income of 240,000 pounds. When market price changes and the resulting revenue remains the same it can be said that price elasticity of demand is unitary in

Based on the above description, forms of elasticity will affect business decisions and pricing strategies differently depending on the nature and type of products or services being offered. Business organizations whose product offerings have elastic and perfectly elastic price elasticities of demand should not attempt to raise prices of their products because it will cause the quantity demanded and consequently total revenues to drop drastically. Businesses can there use the price elasticities of demand to determine whether the proposed changes in their prices will raise or reduce their total revenue. The following expression may be useful in helping business organizations to determine the impacts of elasticities on their total revenues based on the suggested price changes.

c) A Monopolist would never knowingly produce in the inelastic portion of the demand curve because he will want to produce where marginal revenue equals marginal costs and in order to make profits marginal revenue must be positive and a positive marginal revenue means that total revenue is increases as quantity sold increases and this only happens in in the elastic portion of the demand curve.

Price elasticity of demand is an economic measure that is used to measure the degree of responsiveness of the quantity demanded of a good to change in its price, when all other influences on buyers remain the same.

Elastic demand (elasticity) means that demand for a product is sensitive to price changes. Demand elasticity helps a company to predict changes in demand based on changes in: price, competitive goods (substitutes) and other factors such as is the item a necessity or a luxury.

It is normally depicted as an inverse relation of quantity demanded and price; the higher the price of the product, the less the consumer will demand.

Starbucks had branding itself as specialty coffee retailer and differentiated its coffee as high quality coffee for unique tastes and preferences. With the successful product differentiation, the demand of Starbucks coffee has become more and more inelastic compare to that of other coffee sellers. In other words, customers preferred more of Starbucks coffee to other coffee seller as they were becoming more addicted to Starbucks coffee and did not see other coffee as substitutes. Under such circumstances, the change in quantity demanded of Starbucks coffee was highly insensitive to a change in price. Therefore, the quantity demanded of Starbucks coffee remained unchanged when Starbucks coffee price was raised to $3.5. However, the other coffee sellers were having a more elastic demand curve. A small percentage increase in price would have caused a large percentage decrease in quantity demanded. Therefore, other coffee retail sellers have not raised their coffee prices for a long time. Referring to the diagram below, D2 is the demand curve of Starbucks which is more inelastic; while D1 is the demand curve of other coffee retail sellers which is more elastic. When price increased from P0 to P1, Starbucks would have a very small drop of quantity demanded of Starbucks coffee by an amount of quantity Y; while other coffee retail sellers would have a huge drop of quantity demand by an amount of X.

Recall that the elasticity of demand, which measures the responsiveness of demand to price, is given by

A way to comprehend the connection between the elasticity of demand and the profit maximization, it is needed first to conceptualize the ‘demand’ in terms of economic