Econ - Profit Maximisation

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Diagram 3[pic 4]

Diagram 3 shows the changes in demand for alcohol when minimum price is implemented.

Question C – Price Elasticity of Demand

Price Elasticity of Demand distinguishes how the quantity demand of a product responds to price changes, Managers and Business owners usually use this concept to see the affects of demand for their products so they can try different strategies for their products to be sold. It is important for them to have a clear understanding of Price Elasticity of demand and how a price of a product impacts its demand.

The equation for price elasticity of demand is:

Elasticity of demand=Percentage change in the quantity demand[pic 5]

Percentage change in a variable (Price or Income)

Diagram 4

[pic 6]

There are many substitutes for Herbal Essence shampoos Diagram 4 above shows the movement along the demand curve when the cost of Herbal Essence shampoo increases because there are many substitutes available on the market consumers can choose to stop purchasing the product completely and use a different brand. If the owners of Herbal Essence had done substantial market research and took into consideration the effects of the Price Elasticity of demand for their product they would have been able to formulate a better pricing strategy.

Diagram 5

[pic 7]

Electricity is a necessity to everyone on a daily bases, Diagram 5 above shows the movement along the Demand curve when the cost of Electricity increases. Because there are no substitutes available on the market consumers will be forced to pay the high price set out by the suppliers. The owners of the Electricity Company are at an advantage because they are aware of the fact that no matter the cost, consumers will continue to use electricity.

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