Answer to Question #131988 in Macroeconomics for Sme

Question

Explain the type of pricing strategy that you as the manager of a company would implement for Good X and Good Y with the following price elasticity of demand co efficients. Use diagrams to motivate your answer.
a). Good X: 2.3 (10)
b). Good Y: 0.6 (10)

Answer 1

Price elasticity of demand entails a numerical measure of responsiveness of the quantity demanded for a good following a change in it’s price. It can be measured by the formula below

$$PED=\frac{\%\ change\ in\ quantity\ demanded}{\%\ change\ in\ price}\\$$

a.) Since good A has a higher price elasticity of demand i.e more than one, it means that there is a narrow change in the price of quantity demanded. This is shown in the graph below.

Where the quantity increase from $Q_0$ to $Q_1$ and the price increases from $P_0$ to $P_1$ . The extent of these increases depends on the price elasticity of the supply.

b.) When a good is price inelastic, this means that the quantity demanded is not particularly responsive to a change in it’s price. Therefore a large change in the price of a good will result in a lesser change in the quantity demanded. His results in a numerical value of price elasticity of demand between and $1$ . In this case, good X would be classified under this class. This can be illustrated graphically as shown below.

In conclusion, good X and good Y have a positive cross-price elasticity values i.e as the demand for good X increases, also the price of Y increases and vise versa. Therefore the company manager should adopt a competitive marketing strategy that increases the quantity demanded as shown above.