ECN 112 Assignment 2
Price Elasticity of Demand
25 points
Price Elasticity of Demand is defined as: A measure of the extent to which the quantity demanded of a good or service changes when the price of the good or service changes (and all other influences on buyers plans remain the same.)
1. Pick a business that you know something about or can find information on. Describe the business and its main product or service. (2 points)
2. For each of the factors that influence the Price Elasticity of Demand, describe how your main product or service (described in 1.) is affected. Does the factor indicate demand is more elastic or more inelastic?
Substitution Effects
2.1 Luxury vs. Necessity - From the consumers point of view is this a luxury
or a necessity? Does this factor
indicate demand is more elastic or more inelastic?(4 points)
2.2 Narrowness of Definition - From the consumers point of view is the good
or service narrowly defined or broadly defined? Does this factor
indicate demand is more elastic or more inelastic?(4 points)
2.3 Time to react - How long does a consumer normally have to shop around for
this good or service?
Does this factor
indicate demand is more elastic or more inelastic?(4
points)
Income effects
2.4 Percentage of income
- Does the purchase of the good or service represent a large or small portion
of the consumer's income? Does this factor
indicate demand is more elastic or more inelastic? (4 points)
3. Given your analysis, what pricing policy should the business employ? (2 points) Why? (5 points)
Please type up your answers. If you prefer, you can e-mail me your assignment.
A note on retail businesses: Retailing is a service. Many people confuse the products the business sells with the retail service that they provide. If your business sells a lot of products which you don't manufacture, then you need to be looking at the retail service, not the product itself.
When you're determining what pricing policy to recommend, note the following. Most businesses have figured out their current pricing and don't need to change it immediately. For a pricing policy what you need to tell me is if they should be looking to push prices up or down. Use the total revenue test and assume that your company wants to increase total revenue. Alternately, if you really don't think they should be moving prices one direction or the other, then explain to me why their demand is unit elastic.