The objective of this assignment is to use the factors that affect the price ela

Question

The objective of this assignment is to use the factors that affect the price elasticity of demand to determine if your product or service has an elastic or inelastic demand. In addition, use that information to determine how you should be changing your price.

Price Elasticity of Demand is defined as: A measure of the extent to which the quantity demanded of a good or service changes when the price of the good or service changes (and all other influences on buyers plans remain the same.)

Pick a business that you know something about or can find information on. Describe the business and its main product or service.

For each of the factors that influence the Price Elasticity of Demand listed below, describe how your main product or service (described in 1.) is affected.

Substitution Effects
2.1 Luxury vs. Necessity - From the consumers point of view is this a luxury or a necessity? Does this factor indicate demand is more elastic or more inelastic?

2.2 Narrowness of Definition - From the consumers point of view is the good or service narrowly defined or broadly defined? Does this factor indicate demand is more elastic or more inelastic? (Another way of looking at this is to ask how much of the market does your product or service cover. If it covers only a narrow portion of the market, it is elastic. Broad market coverage indicates inelastic.)

2.3 Time to react - How long does a consumer normally have to shop around for this good or service? Does this factor indicate demand is more elastic or more inelastic?

Income effects
2.4 Percentage of income - Does the purchase of the good or service represent a large or small portion of the consumer's income? Does this factor indicate demand is more elastic or more inelastic?

Given your analysis, what pricing policy should the business employ? Why? (See Pricing Note below)

Please type up your answers and submit it through the drop box.

A note on retail businesses: Retailing is a service. Many people confuse the products the business sells with the retail service that they provide. If your business sells a lot of products which you don't manufacture, then you need to be looking at the retail service, not the product itself.

Pricing Note: When you're determining what pricing policy to recommend, note the following. Most businesses have figured out their current pricing and don't need to change it immediately. For a pricing policy what you need to tell me is if they should be looking to push prices up or down. Use the total revenue test and assume that your company wants to increase total revenue. Alternately, if you really don't think they should be moving prices one direction or the other, then explain to me why their demand is unit elastic.

Explanation / Answer

2.1) lets take the business of food items. from consumers point of view food is necessity goods. A percentage change in price will decrease the less quantity of food. so food items have inelastic demand.

2.2) from consumer point of view the food item is narrowly defined so the food item have elastic demand because it is easier for consumer to find the substitute of food item.

2.3) Elasticity of demand varies directly with the time period. Demand is generally inelastic in the short period. It happens because consumers find it difficult to change their habits, in the short period, in order to respond to a change in the price of the given commodity. also food item have a short time period so,food item have inelastic demand.

2.4) When prices of food items change, consumers continue to purchase almost the same quantity of food itmes, if the proportion of income spent on a food itme is large, then demand for such a food item will be elastic.

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