Main Factors Which Have an effect on Price Elasticity Economics Essay

The companies on the market values the importance of gains as the consequences of price changes straight pertains to total revenue received. Total income defines as the total amount of money gained by selling the product in confirmed time which is also associated with price elasticity of demand. Whenever there are changes in the total earnings which is other to the purchase price, the demand is regarded as elastic. If the total changes in the total revenue will be the same directing of price, the demand is inelastic. While the total earnings is unchanged when price changes, this demand is unit-elastic (McConnell et al. , 2009).

The option of alternative is one of the main factors which have an effect on price elasticity. The general guideline is the fact that if there are usually more replacement for any given product, a lot more flexible the demand will be. Taking a good example like the price tag on coffee. When the price of coffee raises, consumers will then switch to having tea instead to get their daily medication dosage of caffeine, that will result in a big reduction in demand for caffeine. This product is regarded as to be an elastic product. On the contrary, if the price tag on caffeine is to increase, you will see no change in the intake of coffee or tea and there is absolutely no or little substitute to levels of caffeine. Consumers will still need it either coffee or tea no matter what the price of levels of caffeine will be. Hence caffeine containing drinks is considered and inelastic product because of its lack of replacement in the market. Another product considered to be inelastic is diamonds. Because they have got few no substitutes (Investopedia, 2010)

The below graph shows the idea of inelastic demand curve;

* Data designed from McConnell et al. (2009)

The inelastic graph above shows a steeper downward slope which means that there exists little change in quantity when there may be a huge change in cost.

* Data adapted from McConnell et al. (2009)

The above graph shows an elastic demand curve which exhibits a gentler gradient and almost horizontal downward slope. This depicts when there is a decrease in price, you will see a huge upsurge in demand.

(McConnell et al. , 2009).

Retailers almost all of the time wish to adopt a company practice called "price skimming". This practice allows owner to set a higher price on the newly launched product to create more earnings from customers who's eager to pay more for this for the intended purpose of using it sooner than others. The success of this practice depends greatly on the inelasticity of demand of the merchandise on the market. This form of practice usually reaps more monopoly revenue for owner in this short-term period. While there is a great upsurge in profits, other opponents will then be enticed to "hitch a ride" as well resulting in more competition. At the same time, the price of the product will lower overtime when more "players" are in the same market.

There is a lot gain in this form of practice as a form of recouping cost for fund used in research and development of the impressive product, advertising and campaign costs. In this way, the practice of price-skimming allows some profits on the set-up expenses. By charging a higher price initially, the main supplier will have the freedom to adjust the price when competition arrives. However, when the price is defined too low first, it will be difficult and not wise to improve the price as this will impact losing in sales level. Along with the high cost of the product, it places the tone of having a superior-quality complexion over its rivals. This is also true for the industry of "designer-label" clothing. The consumers in the forex market could be more brand conscious than price conscious, thus allowing them to spend more in regards to the price. In order words, the more costly the merchandise is, the greater customers would want to buy it (Teacher2U, 2010).

This completely concludes that the seller's motive to sell at a higher price is looking at high returns of income and profits. On another side, seeking high earnings will have to fully depend on the elasticity of the demand of the product and what strategy the company is going to adopt to be able to accomplish its strategic targets.

Question: 1B

Demand refers to quantity of something or service is desired by potential buyers. The quantity demanded is the amount of something people are willing to buy at a certain price; the partnership between price and volume demanded is recognized as the demand romance. Supply presents how much the marketplace can offer. The number supplied refers to the amount of a certain good suppliers are willing to supply when getting a certain price. The relationship between price and exactly how much of a good or service is supplied to the market is known as the supply romantic relationship. Price, therefore, is a reflection of source and demand (Investopedia, 2010).

If there is a cut in way to obtain automobiles in Singapore, resource will move leftwards from S to S2. Level of resource will drop from Qe to Q2. There will be a shortage of cars to cope with the existing demand. As there are inadequate cars to meet up with the demand, suppliers will boost the price of the automobile to P2 (McConnell et al. , 2009).

Demand and Supply Graph for Cars (Current Quarter)

* Data adapted from McConnell et al. (2009)

The level to which a demand reacts to an alteration in cost is call elasticity. Elasticity varies among products because some goods may become more essential to the buyer. As vehicles are luxury goods, the demand for this will be based upon its price, consumer income and the presence other substitutes. Price increase of your good that is considered less of essential will deter more consumers because the opportunity cost of shopping for the product will become too high. Within the next quarter, the demand for automobiles will be foreseen to diminish because of its elastic demand (Investopedia, 2010).

Demand Elasticity Graph for Cars

* Data extracted from Investopedia (2010)

Car is known as to be flexible as a slight change in cost brings about a sharp change in the number demanded. The demand curve appears flatter or even more horizontal as substitutes are available and consumers may not necessarily need them in his / her lifestyle.

When price rises, the buying power of consumers will decrease as the quantity of income available to spend on the automobile will decrease. For instance, if the price of the car rises from $500 to $800 (monthly payments) and income remains the same; the income that's available to spend on car will become more insufficient. The consumer is forced to reduce his / her demand on automobiles. With a rise in price and no change in the amount of income open to spend on the good, it will bring about elastic reaction popular (demand will be hypersensitive to a big change in price)

In addition, Singapore has advanced travel services. Consumers can certainly switch to public transport if they cannot afford to obtain a car after the price increase (a lot more substitutes, the greater flexible the demand will be). The higher prices will lead to consumers to lessen their purchase of automobiles. The demand will be is elastic, or sensitive to improve because a increase in price will cause decrease in demand as consumers significantly reduces car purchase and take more open public transfer instead (Investopedia, 2010).

To conclude, minimize in supply of autos in Singapore will lead to a rise in cost. However, due to higher price, restriction in income and high option of replacement; demand will lowers within the next quarter.

(Word matter: 1250)

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