Economics
Autor: Adnan • March 7, 2018 • 1,178 Words (5 Pages) • 531 Views
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service. This behavior will change based on the type of commodity. For example, toothpaste is considered as a substitute good. If the supplier of one brand of toothpaste (Colgate) increases its price from $2.00 to $3.00 while the supplier of Crest maintains a price of $2.00, the average consumer will switch to the cheaper brand. In the case of complementary goods such as toothpaste and toothbrush, the increase in the price and decrease in quantity demanded of Colgate may directly affect the demand for toothbrushes. Figure 3 below illustrates that as the price increases for Colgate, the quantity demanded decreases.
Figure 3 – Price Elastic Demand
Price
[Student 2015]
Price inelastic demand
If quantity demanded is Price elastic, this means that means a change in price will directly affect the demand for a good or service. This behavior will change based on the type of commodity. For example, toothpaste is considered as a substitute good. If the supplier of one brand of toothpaste (Colgate) increases its price from $2.00 to $3.00 while the supplier of Crest maintains a price of $2.00, the average consumer will switch to the cheaper brand. In the case of complementary goods such as toothpaste and toothbrush, the increase in the price and decrease in quantity demanded of Colgate may directly affect the demand for toothbrushes. Figure 4 below illustrates that as the price increases for Colgate, the quantity demanded decreases.
Figure 4 – Price Inelastic Demand
Price
[Student 2015]
The owner of a retailer uses the concept of price elasticity of demand to develop pricing strategies. This will be used to maintain the profitability of their business and strengthen competitiveness. It will assist owners with their strategic planning as they will be knowledgeable on how the consumer will react to price changes. In the instance where another supplier is offering the same good at a lower price will result in a decrease in revenue as consumers will gravitate towards to lower priced good. Therefore, in order to avoid hindering revenue the retailer will now have to match the price of its competitor.
Bibliography
Griffiths, A. and Wall, Stuart, 2008. Economics for Business and Management, 2nd ed. Essex: Pearson.
John, S., Hinde, K. and Dean, G., 2013. Economics for Business, 6th ed. Harlow: Pearson.
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