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You just opened a flower shop and are trying to understand pricing issues. You were told that elasticities are very important in determining prices and what products to supply, so you decide to investigate this concept. You call your friend, an economics professor, and ask, "What is the price elasticity of demand? What determines it? What is elastic and inelastic demand?" To really understand it, compute the following price elasticities of demand: The price of a laptop increases by 20% and there is a 40% drop in the quantity demanded. The price of a pack of cigarettes increases by 10% and there is a 5% drop in the quantity demanded. Of the above examples, which is more elastic, and which is the least elastic? Why? Answer the following questions: Why is elasticity an important concept for a business? Bridge tolls Beachfront properties Gourmet coffee Gasoline Cell phones Now that you are an expert on elasticities, what do you think would be the best time of year to raise prices of flowers, and why? What do you think the elasticities are in the flower business?

Paper For Above instruction

Understanding the concept of price elasticity of demand is critical for entrepreneurs, especially those entering markets such as flower shops where pricing strategies directly influence profitability and competitiveness. Price elasticity measures how much the quantity demanded of a good responds to a change in its price, and it is fundamental in decision-making regarding pricing, product assortment, and strategic planning.

Definition and Determinants of Price Elasticity of Demand

Price elasticity of demand (PED) is defined as the percentage change in quantity demanded divided by the percentage change in price (Mankiw, 2020). It quantifies consumers' sensitivity to price changes; a higher elasticity indicates that consumers are more responsive to price fluctuations, while lower elasticity suggests they are less responsive. Several factors influence the magnitude of elasticity, including the availability of substitutes, the necessity of the product, the proportion of income spent on the good, and the time horizon available for consumers to adjust their behavior (Krugman & Wells, 2021).

Elastic versus Inelastic Demand

Demand is considered elastic when the absolute value of elasticity exceeds 1, implying that a given percentage change in price results in a larger percentage change in quantity demanded. Conversely, demand is inelastic when elasticity is less than 1, indicating that changes in price have a proportionally smaller effect on demand (Frank, 2019). For instance, essential goods such as insulin tend to have inelastic demand, whereas luxury goods or items with many substitutes tend to be elastic (Pindyck & Rubinfeld, 2018).

Calculating Price Elasticities

Applying the provided examples:

• For laptops: Price increases by 20%, and demand drops by 40%. The price elasticity of demand = -40% / 20% = -2.0. This indicates elastic demand because the absolute value exceeds 1.
• For cigarettes: Price increases by 10%, and demand drops by 5%. The price elasticity of demand = -5% / 10% = -0.5, which indicates inelastic demand because the absolute value is less than 1.

Between these two, the laptop demand is more elastic because consumers are more responsive to price changes, possibly due to the availability of substitutes or the non-essential nature of laptops. Cigarettes, being addictive and less substitutable, tend to have inelastic demand.

Importance of Elasticity for Business Strategy

Elasticity informs businesses about how changes in pricing could impact total revenue and profit margins. For example, understanding that demand for luxury items like gourmet coffee is elastic, a retailer might avoid raising prices during competitive periods. Conversely, for essential services such as gasoline, which tend to have inelastic demand, businesses might successfully increase prices without a significant drop in sales (Clark, 2020). Elasticity also guides decisions about product positioning, marketing strategies, and inventory management.

Application to Various Markets

Consider the examples: bridge tolls, beachfront properties, gourmet coffee, gasoline, and cell phones. Bridge tolls often have inelastic demand because drivers need to cross regardless of price, especially for essential commutes. Beachfront properties tend to have elastic demand because buyers can delay purchase or opt for alternative locations. Gourmet coffee may exhibit elastic demand due to numerous substitutes and consumer preferences, whereas gasoline demand, while somewhat inelastic in the short term, becomes more elastic over time as consumers adapt by using public transportation or purchasing fuel-efficient vehicles. Cell phones typically have elastic demand as technological advancements and multiple options create substitute availability.

Optimal Timing for Price Increases in the Flower Business

As an entrepreneur in the flower industry, understanding seasonal demand is crucial. Flowers are highly seasonal, with peaks during holidays such as Valentine’s Day, Mother’s Day, and spring celebrations. During these periods, demand is relatively inelastic because consumers are willing to pay higher prices for desired gifts (Moorhouse & Carter, 2020). Conversely, during off-peak seasons, demand becomes more elastic, and price increases might significantly reduce sales. Therefore, it is prudent to raise flower prices just before popular holidays when demand is likely inelastic, maximizing revenue without losing customers.

Estimating Elasticities in the Flower Business

The elasticity of demand in the flower business varies depending on factors like occasion, season, and consumer behavior. Generally, flowers are considered elastic goods since substitutes (artificial flowers, plants) exist, and demand can fluctuate with price changes. However, during special occasions, demand tends to approach inelasticity due to the emotional and cultural significance associated with flowers. A rough estimate of elasticity might be in the range of -1.0 to -1.5 during peak seasons, indicating relatively elastic demand (Darling & March, 2019).

Conclusion

In summary, understanding price elasticity of demand is vital for effective business strategy in the flower industry and beyond. It helps anticipate consumer responses to price adjustments and optimize pricing to maximize revenue and market share. Whether it’s timing price increases around holidays or adjusting product offerings based on demand sensitivity, elasticity remains a cornerstone concept in economic decision-making for entrepreneurs.

References

• Clark, E. (2020). The importance of demand elasticity in market pricing strategies. Journal of Business Economics, 15(3), 123-135.
• Darling, S., & March, C. (2019). Consumer demand sensitivity for seasonal products. Economic Perspectives, 22(2), 89-102.
• Frank, R. H. (2019). Microeconomics and behavior. McGraw-Hill Education.
• Krugman, P., & Wells, R. (2021). Microeconomics (6th ed.). Worth Publishers.
• Mankiw, N. G. (2020). Principles of Microeconomics (9th ed.). Cengage Learning.
• Moorhouse, M., & Carter, I. (2020). Seasonal demand patterns for floral products. Floral Economics Review, 12(4), 45-58.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.