Answer to Question #123334 in Microeconomics for Shamema

Question

A producer of a new range of energy drink introduces their product for R25 per can.after a month of sales they introduce a special of R40 for 2 cans. A month later they sell the product at the original introductory price. They subsequently introduce another special after another month of R45 for 2. After a month of sales they re- introduce the original special of R40 for 2 and this special is kept on going numerous months thereafter. Use the price elasticity theory to show why, Cetris Paribus, the producer settles at the initial special of R40 for 2. In your discussion include a comment on the type of price elasticity observed with the demand for this energy drink at these prices

Answer 1

The reaction of buyers and sellers to changing market conditions, in particular, to price changes, can be different in intensity. To characterize the degree of influence of price changes on the behavior of buyers and sellers in the economy, the concept of elasticity is used - the degree of reaction of one quantity to a change in another. This concept is important from a practical point of view. You need to know how the decrease in the value of the goods will affect their sales volumes and revenue. Elasticity is assessed using the elasticity coefficient, which is defined as the ratio of the percentage change in one value to the practical change in another in absolute and relative terms.

The dependence of changes in demand for goods from changes in

its price is called price elasticity of demand (price elasticity of demand).

It is customary to distinguish 3 options for price elasticity:

- Elastic demand, when with slight decreases in prices, the volume of goods increases significantly (ED> 1);

- a single unit of demand, when the change in price, expressed in%, is equal to the percentage of change in sales (ED = 1);

- inelastic demand, if a change in price does not lead to a significant change in sales (ED <1).

Since in this case there was a transition to a lower price and two units of goods are offered, then we are talking about inelastic demand. Applying a pricing strategy specified in the condition, the producer of an energy drink seeks to increase sales, which is typical for goods with inelastic demand.