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You recently opened a flower shop and want to understand pricing issues, specifically focusing on elasticity of demand. You ask an economics professor about the price elasticity of demand, what determines it, and the difference between elastic and inelastic demand. You then proceed to compute the price elasticities for two scenarios: a 20% increase in the price of a laptop leading to a 40% drop in quantity demanded, and a 10% increase in the price of a pack of cigarettes leading to a 5% drop in demand. You analyze which is more elastic and which is less elastic, providing reasoning.

Furthermore, you consider why elasticity is vital for a business, discussing applications in bridge tolls, beachfront properties, gourmet coffee, gasoline, and cell phones. You speculate on the best time of year to raise prices based on elasticity considerations. Lastly, you analyze the likely elasticity in the flower business and conclude your findings.

Paper For Above instruction

Understanding the concept of price elasticity of demand is fundamental for effective pricing strategies in business. Price elasticity measures the sensitivity of consumers to price changes, indicating how much the quantity demanded of a good responds to a change in its price. Formally, the price elasticity of demand (PED) is calculated as the percentage change in quantity demanded divided by the percentage change in price:

PED = (% Change in Quantity Demanded) / (% Change in Price)

Several factors determine the elasticity of demand for a particular product, including the availability of substitutes, the necessity of the product, the proportion of income spent on the good, and time horizon. For example, goods with many substitutes tend to have more elastic demand because consumers can switch to alternatives if prices rise. Conversely, essential goods with few substitutes, like basic medications, tend to have inelastic demand.

Elastic demand refers to situations where a small change in price leads to a relatively large change in quantity demanded. In contrast, inelastic demand occurs when price changes have little effect on demand. Typically, luxury items or non-essential goods tend to be more elastic, whereas necessities tend to be inelastic.

Applying these principles, we examine two cases. The first involves a 20% increase in the price of a laptop leading to a 40% decrease in quantity demanded. The price elasticity of demand here can be calculated as:

PED = (-40%) / (20%) = -2.0

The negative sign indicates the inverse relationship between price and demand, but in absolute value, the elasticity is 2.0. This suggests that demand for laptops is elastic, as consumers respond significantly to price changes.

The second case involves a 10% increase in the price of cigarettes and a 5% decrease in demand. The elasticity is:

PED = (-5%) / (10%) = -0.5

This indicates inelastic demand, as the quantity demanded responds less proportionally to price changes.

Between these two, demand for laptops is more elastic than cigarettes because the percentage change in demand is greater relative to the percentage change in price. The lower elasticity for cigarettes suggests that consumers are less responsive to price increases, possibly due to the addictive nature of the product and fewer substitutes.

Understanding elasticity is critical for businesses because it informs pricing strategies, revenue management, and competitive positioning. For example, in the context of bridge tolls, if demand is inelastic, increasing tolls may not significantly reduce traffic, thus increasing revenue. Similarly, for beachfront properties or gourmet coffee, businesses must assess whether consumers are sensitive to price changes to optimize pricing and maximize revenue.

In the gasoline industry, demand tends to be relatively inelastic in the short term because consumers need fuel regardless of price fluctuations, but it can become more elastic over longer periods as consumers find alternatives or adjust their habits. Similarly, cell phone prices may be relatively inelastic because of brand loyalty and limited substitutes in certain market segments.

Considering seasonal variations, the best time to raise prices depends on demand elasticity. For example, in the flower business, demand fluctuates seasonally, especially around holidays like Valentine's Day and Mother's Day. During peak seasons, demand is likely more inelastic because consumers are willing to pay premium prices for special occasions. Conversely, during off-peak periods, demand becomes more elastic, and price increases might deter customers.

Summarizing, in the flower business, demand elasticity tends to be higher during non-peak periods due to increased competition and the availability of substitutes. To optimize revenues, businesses should consider raising prices during high-demand, inelastic periods and maintaining competitive prices during off-peak times to attract price-sensitive customers.

References

• Krugman, P. R., & Wells, R. (2018). Economics (5th ed.). Worth Publishers.