ECO550 Week 2 Discussion 2
Name
Course
University
4/19/2014
"Estimating Elasticity of Demand" Please respond to the following:
From the e-Activity, analyze the elasticity of demand for products within the selected industry relevant to Katrina’s Candies. Determine the factors involved in making decisions about pricing these products that you believe to be the most influential. Provide a rationale for your response. Elasticity of demand is described as the ratio of percentages of change in quantity to change in price by keeping all other factors constant. It shows that by changing price, demand can be changed too. However, it measures the change in percentage to show that a certain percentage of price change can have the same, less or more than the original percentage impact on the demand. In cases where there is shortage of a raw material and prices increase due to the shortage, the demand in such situations declines given that customers give up buying such products (Hastings &Tejeda-Ashton, 2008). For example, a flood in Brazil which may destroy the entire sugarcane crop can result in less sugar production. The lack of availability of sugar results in high price charged for it which will push the prices to increase and the demand will decrease by the same percentage or more than that. This explains the extent to which the demand is elastic to changes in price which means that to what extent the demand of goods remain unaffected by change in prices. According to the e activity, there has been an increase in income which means that the buying power of customers has increased. They may now purchase more products of the company which will increase demand of the product. However, if income increases and price also increases than there will be no impact on the demand function and the elasticity of the demand will not be affected. It will be almost inelastic given that the buying power of people will remain the same. Increase in income results in a shift of demand curve to the right hence, increasing demand of the product. The important thing to be noted here is that the price of a product is determined by external factors as well. These factors include the prices of competitor products and substitute goods. If the competitors have kept their prices low of similar products and your company is providing the product of same quality at a high
