Answer to Question #269353 in Microeconomics for sweetie

Question

During the summer of 2018, the owner of the outlet offered a discount of 10 percent ,and sales soared from 700 bottles per month to 1500 bottles per month .The discount was withdrawn subsequently.

 

 

This time , to the owner’s dismay ,the sales went up marginally from 700 bottles per month to 800 bottles per month ,and since a reduction in the price had already been announced ,the owner could not revert to the old price soon .He could not reason out as to why the pricing strategy had failed.

 

 

You are required to analyze the reason for the failure of the pricing strategy. While analyzing ,the following points should be used.

 

i)                   Price elasticity of demand during the summer of 2018.

 

ii)                 Factors that have changed since then.

 

iii)                The effect of these changed factors on the price elasticity and the resultant new price elasticity.

 

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Answer 1

(i). The price elasticity demand during the summer of 2018.

price elasticity demand is the measurable change in use of a product due to change in the product's price. The owner of the outlet initially offered a discount of 10% which raised the daily sales by more than 100%, however due to umprupt removal of the discount, the sales reduced instantly. The subsequent removal of the discount caused the failure of the pricing strategy.

(ii). Factors that have changed since then.

Other factors that may have affected the pricing strategy include; availability of substitutes, if the good is a luxury the buyers may have decided to avoid, the share of income used on the good may have reduced in many customers budget, and the shorter time which has elapsed since the price was changed.

(iii) The effect of these changed factors on the price elasticity and the and the resultant new price elasticity.

Offering discounf reduced the price of the product, henceforth the demand increased, upon subsequent withdrawal of the demand the price went higher and the demand reduced.

Discount offering had a higher sensitivity effect on the price elasticity compared to discount withdrawal and price lowering. When the user was offering a discount of 10%, the demand was past half the normal. upon withdrawal the demand significantly went down.

The instability in he product price may have caused the failure in the pricing strategy.