Price Elasticity of Demand and Revenue
Background
In Module 3 you learned about the importance of understanding the relationship between the price elasticity of demand and total revenue when business firms make price strategy decisions. In this assignment, you will have an opportunity to practice how to calculate the price elasticity of demand and utilize that information in a real-world setting by choosing a business you are familiar with. You may choose to use hypothetical data if you cannot find data on your company, or if the data you found does not obey the law of demand.
Instructions
- To receive full credit for this discussion, you need to post (1) your answer of at least 150 words to the two questions below (for a total of 28 points), and (2) two substantive responses of at least 30 words each, to answers posted by other students (7 points). A substantive response is more than just saying you agree or disagree. Explain why.
- Use these Guidelines and Hints Download Guidelines and Hints (click on the link) to perform your calculations.
- Fill out this Summarizing Table Download Summarizing Table (click on the link) after having performed your calculations.
Select a company with which you are familiar and for which you are able to find data on prices and revenues from sales. You need to gather data for at least 5 periods (days, months, quarters, or years). You might find data from EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system used at the U.S. Securities and Exchange Commission: https://www.sec.gov/edgar/search-and-access
If data for your chosen company is not accessible, make sure to use hypothetical data that obey the law of demand. This is very important, as failure to do so will affect how meaningful your elasticity numbers will be.
The Price column in your summarizing table should contain different prices the company has charged in the chosen time period, preferably in increasing order. No more than two prices should be the same. Quantity Sold represents the market demand for the company’s product/service, thus the relationship between P and Q obeys the law of demand. This means that as P increases, the Quantity Sold will decrease and vice-versa, all else equal. This opposite relationship needs to be reflected in the corresponding columns for Price and Quantity Sold. At the same time, for any given price, the company must be willing and able to offer the product/service at that price. This means that the Quantity Sold also represents the quantity supplied by the company. In summary, the Quantity Sold represents the equilibrium quantity the company faces for any given Price. Recall that: Revenue from Sales (Sales) = Price * Quantity Sold
After you have filled out your summarizing table you need to discuss and conclude your company’s price strategy in the current and/or next period, based on your understanding of the relationship between the price elasticity of demand and revenue.
Answer the following questions:
Part I
What is your proposed price strategy for the upcoming period (which could be the coming month, season, or next year, depending on what periods you chose)? Be specific about whether the price your company will charge should increase, decrease, or stay the same, and why. Your answer should be based exclusively on the concept and your calculations of the price elasticity of demand, and its relationship to total revenue from sales. (15 points)
Hint 1: To answer the above question, you might find it helpful (but you do not have to) to imagine that you are one of the managers in your company, and in the next business meeting you will be discussing with the other managers and the company’s CEO what should be the price strategy for the Fall, Winter and Spring seasons this year. Your price strategies for each season could be one of the following: (1) increase the price of the main product your company produces; (2) decrease it, or (3) keep it unchanged. Make sure to use the information about the price elasticity of demand that you calculated in your table!
Hint 2: Hypothetically, suppose that in your company’s last year’s report you found these calculations about the price elasticity of demand: -1.4 from January to Feb; -1.0 from March to May; -0.8 from June to Aug; and -1.7 from Sept to Dec. You need to change these numbers to best fit what usually happens to the demand for a given product your company offers in those four seasons, and/or your own calculations from your summarizing table. These numbers were provided to guide you on what are some realistic and meaningful price elasticity numbers: they should be negative numbers (due to the law of demand), and in absolute value can be greater than 1, less than 1, or 1.
Part II
What other economic or business arguments, other than the price elasticity of demand, may provide additional support for your proposed price strategy? (10 points)
