Consider a product that you have purchased recently. If the price of this item i

Question

Consider a product that you have purchased recently. If the price of this item increases, how would you adjust your purchases? Is the Demand for this product Price Elastic or Price Inelastic? Justify your classification by applying the determinants of elasticity to this product. Suppose price of this product is on the rise and you are the store manager. Would you be thrilled to be selling this product? How does an increase in price for this product affect your Total Revenue? Using specific examples, relate the concepts of Cross Elasticity and Income Elasticity to this product.

Explanation / Answer

If I have purchased a product and price of the product increases then, demand of that product decreases because increase in the price of commodity decreases the purchasing power of the individual. When demand of product changes due to change in the price of the commodity then, demand of that product is price elastic. On the other hand, if demand of product remains the same irrespective of price change then, it reflects price inelastic. Determinants that affect the demand of a product are income of the consumer, price of related goods, taste and preference of the consumer, price of the commodity, etc.

If price of commodity increases and I am the store manager then, it affects the total revenue of the firm. If due to increase in the price of commodity, total revenue of store increases then, demand of goods is inelastic but if total revenue of firm decreases then, demand is elastic. If increase in income increases the demand of this product then it shows product is normal good otherwise inferior in nature.

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