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Discussion: Price elasticity of demand
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joehauet |
Price elasticity of demand
Nov 4 2008, 12:34 PM EST
we have recently discussed in class how firms with market power will charge people different prices based on the customers differing levels of elasticity. Besides airlines, can you think of other markets in which this practice successfully takes place. Make sure to include a description of the market and how the firm manages to charge customers different prices based on their differing levels of elasticity. Feel free to comment on others ideas.
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Max.Spielbichler |
1. RE: Price elasticity of demand
Nov 5 2008, 12:38 PM EST
The Cigarette Industry. The cigarette industry is huge. Millions of people smoke, and millions of people can't stop the habit. Cigarettes are an inelastic good, because people get addicted to them, and there are no substitutes (except if looking at drugs). People will pay any price then to consume cigarettes. So, if the cigarette market increases its prices to make the most total revenue as possible, there will be a very slight chance of failure. If there are taxes imposed on cigarettes, which is happening at the moment, the firms can push all of the taxes onto the consumer, without the consumer minding. Ofcourse there are going to be some complaints, but will it change the consumer's demand for cigarettes, especially knowing that its hard to stop? Nope. Thus, a cigarette company is a pure profit company. All taxes can be pushed onto the consumer, production costs can still be minimized and prices can still be pushed up to the firm's likings. Do you find this valuable? |
GuillaumeDubois |
2. RE: Price elasticity of demand
Nov 5 2008, 4:47 PM EST
Museums / Archeological Sites.The main reason that museums and archeological sites can price at nearly every price is because the contents, or the good that consumers will purchase from the museums are priceless. The easiest way to understand this is if we imagine a demand-supply graph. The Supply curve would be nearly perfectly vertical, meaning that at any price, the quantity demanded will always remain constant. If we incorporate a demand curve, it would almost certainly be slightly tilted, or nearly parallel to the supply curve. This means that (because the law of demand still applies) the quantity demanded will eventually start to decrease as price continues to increase. This also applies if price keeps decreasing; quantity demanded will eventually increase at every price. In conclusion, museums are inelastic goods because no matter what price, there is only one "Mona Lisa" and people will pay to see this piece of art even if the price increases from $10 to $15. (Naturally the extremity of the elasticity will vary from buyer to buyer). This implies that a Museum can be very profitable - prices can be raised without demand dropping significantly. Do you find this valuable? |
robschenck416 |
3. RE: Price elasticity of demand
Nov 6 2008, 3:44 AM EST
Concert Tickets:Although, usually, the direct seller of the tickets does not raise the price of tickets, many people buy tickets for a concert and then attempt to sell the tickets right before the concert, when all the tickets have already been sold. Often, they will price the tickets much, much higher than they paid for the tickets themselves, as people will be willing to buy them. The buyers will have much less time to buy tickets, and the direct seller of the tickets would most likely be sold out. Therefore, the buyers would only have one opportunity to buy tickets and see the concerts, and therefore are willing to pay much more than the ticket was initially sold for, so their demand would be very inelastic. Yes, this isn’t an ideal market that regulates prices according to customer’s elasticity (such as airlines) as the market is very uncontrolled and uncoordinated, but it still demonstrates that when consumers have less time to buy something and have no close substitute available, their demand for a product is often extremely inelastic. Do you find this valuable? |
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robschenck416 |
4. RE: Price elasticity of demand
Nov 6 2008, 3:55 AM EST
"Museums / Archeological Sites.I like your example- wouldn't have thought of that one myself, and it is quite logical. If an individual travels all the way to Paris, and wants to see the Mona Lisa, it is fairly likely their demand would be highly inelastic as they've already paid a lot of money to go to Paris, and most likely won't return. However, there are also exceptions- think of a school trip. If the Mona Lisa all of a sudden costs 50% more to see, it may not be a deal-breaker for a vacationer or a similar individual, but for a school who has to pay 50% more for every student, it could cost quite a bit extra, and as a result, that group of students may not see the Mona Lisa. Also, Airlines regulate their price constantly- so they're constantly changing it. I'd think Museums would do the same depending on the season/number of visitors. During a month where there are a lot of tourists, the Museum could raise the price as the tourists are much more willing to pay more than other individuals, and there is a greater quantity of them, so it wouldn't impact the total revenue of the Museum that much if they lost a few customers. However, in other seasons when there are few tourists, and the main visitors are perhaps local to Paris or are students, they may lower their price so that they can maximize their total revenue, as those individual's demand is much more elastic than that of the tourists. Do you find this valuable? |
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jun.h.p |
5. RE: Price elasticity of demand
Nov 7 2008, 1:12 AM EST
Sometimes merchants in traditional markets could have an equivalent of market power. This happens usually when the merchant has an upperhand over the purchaser. The superiority might be in terms of information or the abiltiy to haggle. For example, when the purchaser is from a faraway region, it is unlikely that she/he would have much information. On top of this, if the purchaser is under time constraint, she/he is not likely to haggle over the price too much; clever merchants can detect these sort of people. Of course, if the purchaser looks outright like a foreigner, the merchant has no problem in cheating the purchaser. In other cases, the seller might just be much more better at haggling than the buyer. This ability includes eloquence in speaking, shrewd wits at finding how willing the buyer is to purchase the good. Occasionally, the seller is so skilled at advertising his/her good, that the buyer would buy the merchandise at an almost abnormal price. In any case, skilled merchants have the ability to sell marchandises at the highest price possible, whoever the customer might be, according to the elasticitiy for demand of the customer.
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moritzreithmayr |
6. RE: Price elasticity of demand
Nov 7 2008, 8:41 AM EST
Estate agents charge different amounts for houses depending on the customers elasticity. Right now, during the financial crisis they have to charge a very low price and because demand is very elastic they don't have much choice though. The perfect country for this is England. People who show great enthusiasm will get immediately get asked for the asking price, which doesn't mean that this will be the final price though. People who are not really convinced they will buy the house have a higher chances of getting the houses with a lower price because the estate agents know, or think they know, about the elastic demand they are facing. What basically enables the firms to charge different amounts is that they ask their customers individually for what they would be willing to pay for the house. If they sense that the customers are willing to pay a higher amount they will be less willing to sell but wait for a better offer. Do you find this valuable? |
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VirginiaHasenmeyer |
7. RE: Price elasticity of demand
Nov 8 2008, 6:05 AM EST
The bubblegum industry The bubblegum industry has its varieties and is a cheap industry. If the price of gum is 1.20 and it increases 50% the price will 1.80, which is still a cheap price, there for gum is inalasitic because we wouldn't mind if the price increases because it is still very cheap. Bubblegum is an example of an inalastic good because it takes up only a small amount of our monthly wage. Therefore, almost everyone will always be able to purchase gum. Gum is not a necessity, because gum is not something that we have to have so that we survive. Also gum , is not a luxury good because it is not expensive. In conclusion, gum is a product which we can purchase even if the price goes up. Do you find this valuable? |
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aeberhard |
8. RE: Price elasticity of demand
Nov 8 2008, 11:18 AM EST
Electricity is another market in which the providers can easily increase prices without having to worry about losing too many customers. This, as in every other example, works better if there is a monopoly, but even with multiple suppliers, the demand for electricity is still pretty inelastic. It is after something that we not only take for granted, but need for our daily life. If we were to responsive to the price of electricity, we would not be able to work, travel, communicate etc. nearly as well as with electricity. Therefore, electricity can be called a necessity, which furthermore indicates it's elastic nature. Although here as well, the elasticity of different people will be different, and electricity companies may charge people in areas with a more elastic/inelastic demand differently than in New York City for instance. Do you find this valuable? |
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jordan_reid_zis |
9. RE: Price elasticity of demand
Nov 9 2008, 3:04 AM EST
Car Dealerships tend to treat every customer on their own, and often change the price of the car up or down depending on the customer. I like the example of the museums. The reason that car salesmen do this is because cars are expensive goods, and there are different levels of demand for cars; for example, someone who lives 5minutes from the centre of Zurich, and 6 minutes from their working place will have a totally diferent level of demand for a car than someone who is 40 minutes from the centre of Zurich, and 39 minutes from his working place.
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kaidieter |
10. RE: Price elasticity of demand
Nov 9 2008, 10:05 AM EST
One example of a market with different levels of elasticity is the pharmaceutical industry. Different medicaments can either have an elastic demand or an inelastic demand. What is meant by elasticity, is the responsiveness of a consumer to the change of a factor that determines the product (example price). The demand of a product is elastic, when the percentage change in price is smaller than the thus occured percentage change in quantity demanded. Hence, the price increases slower/less while the quantity demanded decreases faster/more. Vice versa when talking about inelastic demand.Now, looking at the market for medicaments, both forms of elasticity can come about. A certain brand of cough drops can be considered an elastic good, whereas a vitally important asthmaspray is strongly inelastic (assuming the consumer has to cover the costs on his own). This becomes obvious in the case of producers increasing the price of both goods by 20 %. The quantity demanded for cough drops would decrease far more rapidly and strongly than the quantity demanded for asthmaspray. There are two major factors, which explain this reaction. First of all, the certain brand of cough drops has many substitutes, to which the consumer could refer to, when they aren't willing to pay more for it. Even for the whole market of cough drops there are a number of substitutes, which can cure a cough or a sore throat, and thus make cough drops more elastic. Asthmaspray, however, doesn't have many substitutes, if at all. This also makes it a Necessity. Consumers are willing to pay in a much greater range for a necessary good, meaning their demand for this good is inelastic. Do you find this valuable? |
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HelenPoxon |
11. RE: Price elasticity of demand
Nov 10 2008, 1:40 PM EST
Supermarkets Supermarkets are an example of companies who compete for market share. Supermarkets are constantly competing with each other by offering deals to the consumers. An example of this would be where "Asda's" might offer a deal such as three for the price of two on a product for example cerals. Where as "Tescos" may offer a striaght forward reduction for a period of time. This kind of offer can be for a short period of time to pull consumers in quickly to take advantage of it. The theory of this is that once you have the consumer then they will stay with you for a while, even after the prices have returned to normal. This shows you that peoples elasticity with price is very sensitive. Loyality to one company can be easily lost through quite small movements in price. All supermarkets will have a core base of consumers that are loyal to them. They care more about such things as service, quality of goods, and location of store. These consumers are less price elastic. Do you find this valuable? |
alexsvensson |
12. Price elasticity of demand
Nov 10 2008, 2:05 PM EST
Although fairly similar to the airline industry, the "space tourism" market is great example of how different prices are charged depending on consumer elasticity. Currently, the British entreprenuer Richard Branson is developing a company called Virgin Galactic, which will offer flights into space for any "normal person" - that is, not just astronauts. This venture is so ground-breaking, that Branson is able to charge huge prices for the very first flights into space. Although his company will continue to offer flights into space for many years to come, there are obviously people who would pay pretty much anything to go into space, and now they can. The tickets to go up into space with Virgin Galactic currently cost $200'000, and so far many celebrities and multi-millionaires have booked a flight. People such as Paris Hilton, and designer Philip Starck are very inelastic customers, as they want to be one of the first people to take part in the flights, no matter what the cost. Other customers, who might have a more elastic demand, can just wait a year or two, and the price will have gone down by an incredible 90%, so that a flight into space only costs around $20'000. This concept of offering a market something extremely new and ground-breaking is interesting: Not only are people driven by their personal desire to buy the trip, but many might consider it a status symbol to go up into space, and so they might be even more inelastic than usual. It is not often that new markets open up like the space-tourism market has, and it will be interesting to follow how the elasticity of demand changes with time. Do you find this valuable? |
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lailabrenninkmeijer |
13. RE: Price elasticity of demand
Nov 14 2008, 8:27 AM EST
In my opinion the market of any addictive product is very inelastic. An example of an addictive product is heroin. Heroin is a very addictive drug, with most people it causes addiction the first time they try it. It is extremely hard to heroin you are never really go off it 100% and there is always a chance of relapsing. Therefore the heroin is an inelastic product; people will keep purchasing it and keep needing it therefore paying and doing anything for it. Therefore the industry can charge any price for the product increasing the revenue therefore increasing the profit. Ceteris Paribas the demand for heroin will always stay the same therefore if a tax is imposed the producers will push it upon the consumers because they know that no matter what price the chances are they will still purchase it because for them it is a necessity.
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BTANK |
14. RE: Price elasticity of demand
Nov 14 2008, 9:03 PM EST
Water. In certain scenarios when water is in high demand, such as during storms. Due to the high amount of people needed water, the people wiht posession of the water are able to raise the price of it or lower the price depending on the case.
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Benji-Bucket |
15. RE: Price elasticity of demand
Nov 17 2008, 9:14 AM EST
Mac and the iPod/Mp3 player industries. When the ipod first came out, with no serious substitutes, they could charge 500 franks to start with. From a day to day basis, people had no choice and had to pay that much if they wanted the technology. In the long term though, other substitutes were invented and people could make decisions, making the product more elastic. reacting to the differing levels, they lowered the price which then decreased steadily until they came out with a new product.The new product, is then superior to the previous product and other substitutes due to the social status that it brings with it. Infact with the iPhone, it brought so much status with it, that in the beginning, when it was so expensive the product was very inelastic due to it becoming a Veblen good. This meant that the starting price could be as high as Mac wanted it to be. They also developed a system called itunes, which only allows iPods to work with it, forcing people to use it and making it less elastic due to it virtually addicting users to the ipod. As soon as a person has owned one iPod, they load their music onto itunes, and buy it off itunes, and next time they buy an mp3 player it has to be an ipod, they are addicted and have no choice. Due to the addiction and dependence element, the iPod has then, even though there are many substitutes been able to go up in price yet again. Do you find this valuable? |
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Rocioperez |
16. RE: Price elasticity of demand
Nov 18 2008, 12:17 PM EST
Benji's example of the Ipod is a good example of a product which becomes elastic due to time(one of the determinants of price elasticity of demand). The firm (apple) knew that they had to lower their prices of the later Ipod models, because even though they were more technologically advanced, its luxury status decreased as more and more people bought them. People no longer viewed it as a luxury and the product became more elastic over time. I'm not sure I understand what you mean when you say "the new product, is then superior to the previous product". Wouldn't the new product be inferior to the previous product, because it now has more substitutes and it is not viewed as valuable, due to the fact that most of the people are seen walking around with them. Correct me if misinterpreted it. I also don't necessarily agree with your use of the term "addictive" for itunes. You are definitely right in the fact that apple cleverly creates a program which you need in order to download music onto your ipod, but instead of it being addictive, I picture itunes and ipod as complementary products. If you don't have and ipod, you cannot use itunes. If you don't have itunes, you cannot legally download music onto your Ipod. Do you find this valuable? |
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Rocioperez |
17. RE: Price elasticity of demand
Nov 18 2008, 12:22 PM EST
I couldn't fit anymore words in my last post so I had to do this separately...Anyways, another example of a product that is manipulated by the firm to control its elasticity are diamonds. Instead of putting out all the diamonds in the market, they are stored so that the few diamonds available for sale are scarce. This scarcity makes it a superior good, or a luxury, and thus an elastic good. This is the opposite of what happened to the ipods, which became so abundant that it was no longer viewed as such a luxury. Do you find this valuable? |
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TheresaMehl |
18. RE: Price elasticity of demand
Nov 18 2008, 12:28 PM EST
I really like Gulliaumes example with the inelasticity of museums. It clearly makes sence since people who go on vakation to see special cites would not react much to a price change. It is mostly because it is a once-in-a-lifetime experience that you will not get any more often. The graph for this would be almost perfectly vertical, since these places have a constant amount of consumers no matter if the price changes. Of course it is not perfectly vertical since some prices would take up too much of a person's income, so certainly at some point people would stop buying it. But this would have to be a change to a very high price, than bevore. Do you find this valuable? |
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Sabrina.W |
19. RE: Price elasticity of demand
Nov 18 2008, 3:59 PM EST
this is an interesting concept. mr. hauet brought up his visit to the louvre one day in class and that fit perfectly into this idea. his point was more to do with consumer surplus, for he was willing to pay so much and he got in for a cheaper price. but that can also be applied to this case. Mr.hauet was willing to pay more to go see the priceless artifacts, so if the museum raised the price he would still visit. this is only one example, but if a museum houses a certain treasured artifact there is no reason why it coudlnt be considered able to change prices based on consumer elasticity.
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