8/4/2019 Econs CT Model Essays[1]

1/4

Ic4 I{ \\l{ltnvlt - N)5o3

Jek-tA")

ewe^J *.J lr.Gu^a.

g"

ivea

8/4/2019 Econs CT Model Essays[1]

2/4

o le.n t[c.rn ,r$aftr- eco\nacoe \- i."" &r^^*rJ"{.I1^"- l> h^d1^-, .tarrtt

8/4/2019 Econs CT Model Essays[1]

3/4

H2 Economics Essay Practice Chapter 2b- Elasticities Concepts

Knowledge of price and income elasticities of demand is important to a supplier for he can makeuse of this knowledge to adjust his pricing polity or marketing strategies in order to maximize prondithis case, we assume that the supplier's aim is to maximize profits. As such, knowledge of theseelasticities of his good would allow him to decide on his price and outpu! allowing him to achievemaximum profits.D . .^ -. As his good is currently fashionable, the price elasticity of demand of his ggnd is likely to beI n'qrfelastic '.T,his_2lecause there should be very few substitutes for his ggbffi^oment which hencecontributffo the fact that his good is "currently fashionable." As such, at the present moment, he canadopt an increase in price pricing policy.As the demand of the good is price inelastic, an increase inprice will lead to a less than proporti-onate decrease in quantity demanded of the good. since Totalrevenue= Price x Quantity, increasing the price of his ggod now would result in an increase in totalrevenue. This is exemplified in Fig 2.1.

when,,pdce is at ps, the total revenue isOPdOo. However, if the supplier incrdasesthe price to P1, the new revenue would beOPlBQr. The loss in area of revenue isqC.AQr. However, the gain in area ofrevenue is PoPrBC. Since the area oy'P'PIBC > the area of %AgJ&is a netgain in revenue. This implies that if thesupplier wishes to increase his totalrevenue, he should irrcrease the price of hisgood immediately.

However, as time passes, the demand of his good would become more and more price elastic, due tothe development of more substitutes in the mar$f.a66hence, the similar approach adopted abovewould not be applicable. lnstead, if the suppli6-rstill wishes to increase his total revenue, he can lowerthe price of his good to increase the total revenue. ThZgredtion is the exact opposite of the onepresented above. Alternatively, the supplier can focus on non-pricing policies, such as advertisements or -/product differentiation, to make his goods less substitutable. He can do this through offering more -/specialized services and technical help, if applicable, for his good or by introducing different and newfeatures lnto his product. This will also help create brand loyalty. Allthese would help make the demandof his good less price elastic. Subsequently, when the demand of his good is relatively more priceinelastic, he can adopt a similar approach presented in Fig 2.1. (lncregsing his price to increase totalrevenue) -/-/

Discuss how a supplier of a product that is currgntly fashionable might u3e both of theseconcepts in making price and output decision, (13)

f,'{.u. o(s' Jb,- ?@ . qlu* + d*!

8/4/2019 Econs CT Model Essays[1]

4/4

H2 Economics Essay Practice Chapter 2b- Elasticities Concepts

)rg ul Ill> 6uuq lvl DqIs ql wsqrLrrrer

^.tnr* r4 However, if consumers' incomes are expected to drop, he can package hIs good such that it 1 \{ {*ff* ',:"': /#"r"n,, to the consumers as more of a necessity than a luxury. ln this way, the quantity demanciec 'li U,t'*tr^- ldi, eooa would not fluctuate as much and hence, his total revenue would not be affected bV a lat./ .'v'1.

Given that his good is currently fashionable, and assuming that the2omy i3 not experiel'lcirilgany recession now, we cah say that the demand of his good is income el.6rtc. (nowledge of this eoncerptwould be important in helping the supplier decide when and how much to produce at what timings. lfconsumers, incomes are expected to increase, the supplier can expand the number of retail oullets toUroffer more of his products for sale. He can also make the demand of is good more income elastic bt-introducing features to make it more luxurious or exclyidaddition, if his good is a luxury good, he , -1can offer more of his good for sale at wealthier distrifts. ->, j"'!::" r

ln conclusion, it is essentially important for producers to study the price elasticities of theirproducts so as to be able to adopt suitable price policy to increase their total reuyN. However, heshould be aware that such elasticls values are constantly changing in the dynimic economy and hencethere might be a time-lagegJrl6'n gathering the value of the elasticities of his good andimplementation of policiei Mor"ou"r, introducing policies such as marketing strategies which inclueles( advertisements incur cost and thus may-only be feasible if the gain'in total revenue is more than tltre/ aoa", cost incurred. Otherwise, ttre fi6lier would still be suffering a loss. Lastly, the assumption that thet;il;";;rl;;";,rize profits may not hold true aisome suppliers'aims mav be to maximizer,/revenue rather than profits or to maximize growth in sales volume over time to aid in intery!y'pan" tuil'

{L