You just opened a flower shop and are trying to understand pricing issue.
A) In order to be able to understand it better you are going to have to compute the following price elasticity’s of demand. What would happen if you were told that the elasticity’ are very importantin determining prices and what products to supply, so you decide to investigate this concept.
B) An Inelastic demand represents a change in price that will cause a smaller percent change in demand. It simply means that people are not responsive to the changes in price. In order to recognize an inelastic demand you should know that it will have some of, or maybe all of these following characteristics:
a) Not very many close substitutes, for instanced if you own a car and need to drive to work, you will need to buy gas.
b) Then buying gas will be a necessity, so you will have the necessity of purchasing gas in order to travel; so you will have to pay for the higher price of gas.
c) If there is a small percentage increase in the price salt, it will probably not even be noticed.
d) If a product that you do not buy frequently, (like toothpicks) has an increase in price you won’t bother about the higher price.
To really understand it, compute the following price elasticity’s of demand:
The price of a laptop increases by 20% and there is a 40% drop in the quantity demanded.
1) The price of a pack of cigarettes increases by 10% and there is a 5% drop in the quantity demanded.
Of the above examples, which are more elastic, and which is the least elastic? Why? Answer the following questions:
2) Why is elasticity an important concept for a business?
- Bridge tolls
- Beachfront properties
- Gourmet coffee
- Gasoline
- Cell phones
3) Now that you are an expert on elasticity’s, what do you think would be the best time of year to raise prices, and why?
4) What do you think the elasticity’s are in the flower business?