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Change Leaders

In: Business and Management

Submitted By zuni
Words 678
Pages 3
Essay # 1

Sep 26, 2011

1. Why is it that a profit- maximizing businessman would always raise prices when facing an inelastic demand curve, but might or might not raise prices when facing an elastic demand curve? Explain and justify your answers in detail.

Elasticity: “The percentage change in one variable relative to the change in other variable”.

Price elasticity of demand is defined as “parentage change in quantity demanded, caused by a 1 % change in price.

Total revenue = Price * Quantity demanded

The demand is inelastic for goods considered to be necessities, and it is elastic for luxury products. For example the demand of furs, gems, and expensive automobiles is probably more elastic than the demand of milk, shoes, and electricity. When the demand is inelastic a profit maximizing businessman will raise price, when dealing with an inelastic demand curve because he expect to increase total revenue.

An example may be the case of salt. Today’s price of salt is about 44 cents per pound. If this price were to rise to 54 cents, or fall to 34 cents, it is very doubtful that the consumption of salt would change. People will still keep buying the inelastic items anyway of the price increase.

When demand is elastic, profit maximizing businessman might or might not raise prices because an elastic demand is very price sensitive so, when price increase the demand drops and total revenue will drop.

Let’s take example of the famous Italian sports car Ferrari. This car is usually owned by celebrities or wealthy people. The price of this car usually stays the same or most likely goes up because the customers of this car don’t care about the money but the label. There is no substitute of this car. The market is elastic for this car; a change in prices will barely change demand.

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