Jeffery S. Short
Element A: The world of business exists because of the consumer. Business owners are concerned if customers will purchase the goods they offer and how they will react to the constant changes that occur in the marketplace. If a business owner can estimate how consumers will react to product offerings or the changes to those products, then they can offer better services while maintaining profitability.
Economists study the many variables involved in the marketplace by observing how consumers react to changes in products, pricing, supply and demand in an effort to classify or codify trends. They then develop calculations to categorize these consumer patterns, and then use them as tools to provide insight into consumer reactions and possible future buying patterns. One of these tools is called the Price Elasticity of Demand. The Price Elasticity of Demand measures how consumer demand changes as a result of changes in price and it is represented as a coefficient. Elasticity is the main aspect of this coefficient and it represents how responsive or elastic consumers are to price fluctuations. This coefficient is calculated by dividing the change in demand by the original demand, and subsequently dividing that total by the change in price divided by the original price and the final result is presented as an absolute value. The resulting coefficient can then be separated into three different categories: elastic, inelastic and unit elastic demand. Elastic Demand is determined when the calculations result in a coefficient greater than 1. A coefficient greater than 1 means consumer demand is highly reactive to changes in price. If demand is elastic, a estimated decrease in price of 5% would result in an increase of demand greater than 5%. For example, if a fast food concession had implemented a marketing campaign to bring in new customers and by reducing their hamburger prices by 20%, they increased their customers and overall sales of hamburgers by 50%, you would say that the demand for hamburgers was elastic. Inelastic Demand is determined when the calculations result in coefficient less than 1. A coefficient less than 1 means that consumer demand is not very reactive to change in price. Given the example above, if the sales of hamburgers only moderate increased by 5% or 10%, you would say that the demand for hamburgers was inelastic. Unit Elastic Demand is determined when the calculations result in a coefficient equal to 1. Meaning that a change in price would result in a reciprocal change in sales. A 10% reduction in price would result in a 10% increase in sales. Element B. Cross Price Elasticity refers to how price fluctuation in one product influences the demand on another product. The resultant factor of a cross price elasticity calculation measures a product to be a substitute or a complimentary product. The demand on a substitute product would contrast to the demand on a complimentary product. As the demand of a product increases, the demand for a complimentary product would also increase. For instance, if the demand for Ketchup increased as the demand for frozen French Fries increased, you would say that Ketchup is a complimentary product to French Fries. Likewise, at the beginning of summer, swimsuit sales will increase and as a result, sunscreen sales will also increase. You can then determine that sunscreen is complimentary to swimsuits. As more skin is exposed, more sunscreen will be applied. In contrast, substitute products will not react in the same manner. As the demand for a product increases a substitute product will not increase or may even decrease. For instance, if the price of beef increases, the demand of beef may decrease and the demand for chicken or pork may increase. Beef is therefore being substituted with chicken or pork. Demand for any one product is influenced by price or availability and the demand