Is the demand curve for your product relatively elastic, inelastic or unitary elastic?
this week’s discussion your are going to be the CEO of a company. In anticipation of the upcoming quarterly disclosure of profits, you prepare your Board of Directors for the challenge that cost-push inflation having on profits. Please make yourself CEO of only one of these hypothetical companies.
All America Grocery Inc – We serve communities in the middle of the income market providing low prices for all basic grocery needs. Our modest income consumers expect goods deals on good quality foods. The Covid-19 pandemic has put upward pressure on the price of everything we sell. We have also experience rising cost in every aspect of our operation as we have to put extra resources in to protecting both our employees and the public. We are both fortunate and unfortunate that the price elasticity of demand for food is .20.
Very Big US Auto – Very Big US Auto is one of the oldest and one of the largest auto manufacturers of autos in the US. Very Big US Auto’s supply chain is highly dependent components manufactured in China and assembled in the US. Like the US economy the Chinese continue to have major stoppage in production due to Covid-19. Additionally manufacturing facilities like ours must take extra precaution to keep workers safe. Costs are rising we are experiencing rising costs. Very Big US Auto know that demand is relatively elastic with a price elasticity of demand of 1.2. We also know that the supply of auto is relatively inelastic and all our competitors are facing the same cost increase.
Big Time Entertainment – Big Time Entertainment is a nationwide firm providing movies, arcades and other entertainment venues such as bowling and roller skating. Our operations have been heavily impacted during the Covid-19 pandemic. On reopening we have been faced with a host of regulations that have greatly increased our cost of operation, everything to operating far below our optimal number of patron to higher cost for cleaning and other measure to protect the public and our employees. Price elasticity of demand is 1.6 and we are also face with competitors, online entertainment and gaming, that are not experiencing these cost pressures.
Now explain:
Is the demand curve for your product relatively elastic, inelastic or unitary elastic? Demonstrate for your company’s product, by how much the quantity demanded will change if you pass on a 10% increase in cost. In other words, show your calculation of the percentage change in the quantity demanded given a 10% change in your price. You must provide a calculations showing the percentage change in quantity demanded.
Given your company’s and price elasticity of demand and the industry supply/competitive environment you face prepare a statement for your board as to the potential impact on profits. Who will pay the larger share of the cost increases, your firm or your customers?
Answer preview Is the demand curve for your product relatively elastic, inelastic or unitary elastic?
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