Elasticity There are two companies, A and B. Company A lowers its price for a ce

Question

Elasticity

There are two companies, A and B. Company A lowers its price for a certain product by 6% and sees an increase of about 12% in revenues.

Company B tries a similar move: it lowers its price by 6%, but its revenues go down by 3%.

a.) Explain what is happening in the cases of Company A and Company B.

b.) What do you think might be the difference between the two companies? Are they selling the same or a very similar product? Are they selling to the same or to a different group of customers?

Explanation / Answer

Price elasticity of Demand = % change in quantity demanded / % change in price

Price elasticity (Company A) = 12 % / -6% =-2.0

Price elasticity (Company A) =-3 % /-6% = 0.5

Hence,for firm A Demand is elastic which means that quantity effect overpowers the price effect. In other words, any increase in price will decrease the demand vis-a-vis revenue and vice versa.

Incase of firm B Demand is inelastic which means that price effect overpowers the demand effect. In other words, any decrease in price will decrease the demand vis-a-vis revenue.

No, both the firms are selling different products and to the different set of customers and PED for both the products is different.

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