Managerial Economics class dicussion wk7 - Essay Example

Elasti of Demand Institution:Price elasticity of demand is the proportionate change in the quantity demanded of a commodity with respect to change in price of the commodity. It measures a unit change in the amount of a commodity which a consumer buys when the price of such a commodity changes by a unit. Goods whose change in price greatly influences their demand are said to be very elastic while those whose prices do not vary highly with demand are said to be inelastic. Goods with a high elasticity of demand include close substitutes, goods with high necessity, those occupying a large proportion of consumer’s income and those goods with a low switching cost.

Substitute goods such as barter and margarine derive the same satisfaction to a consumer and they have a high elasticity of demand in that when the price of one increases consumers will purchase the substitute hence reducing its demand. Before changing the price of such substitutes a manager should ensure that he adds value to the product in order to increase the good’s utility as compared to the substitutes. You can also consider increasing the products awareness through advertising.Cross elasticity of demand is the proportionate change in the demand of a commodity as a result of the change in the price of another commodity.

Substitute goods such as cereals offer the same satisfaction to a consumer and they have a high cross elasticity of demand because when the price of one increases the demand for the other substitute product increases due to a relatively low price Krugman et al, 2010. Such substitute cereals include maize and rice. If a manager wants to reduce the cross elasticity of demand of his products he can still consider adding value to the product so that its competitive advantage is increased. High quality products should also be offered so that the customer loyalty is increased.

A good will have a high income elasticity of demand if a change in its price affects the consumer’s purchasing power. A luxurious good such as a car will have a high income elasticity of demand if there is a change in the income of a consumer. If the consumer’s income reduces he will no longer be able to purchase the product hence reducing its demand by a unit. A manager can consider coming up with purchasing plans such as purchasing the goods in instalments so that they can still remain affordable to the consumer.

ReferencesKrugman, P. R., & Obstfeld, M. (2010). International economics: theory and policy (5th ed.). Reading Mass.: Addison-Wesley.