In order to receive an exemplary score on the 3 different elements of the elasticity of demand section, you’ll need to meet the following criteria:
-Analyze available data and information to justify how the price elasticity of demand for the firm’s product was determined and use research to illustrate these claims (see underlined text in the sample paper for an example of how to meet these criteria). In other words, be sure to state whether you have concluded the demand for your good is elastic or inelastic and use specific evidence to explain why. While you may be able to find enough information to calculate the price elasticity of demand, this is not required. You can use research on the factors of consumer responsiveness or evidence based on pricing and revenue growth to support your claim.
-Explain all 5 factors that affect consumer responsiveness to price changes for the product using the concept of price elasticity of demand as a guide (see bold text in the sample paper). The factors affecting consumer responsiveness are: the availability of substitutes, the passage of time, luxuries vs. necessities, the definition of the market, and the share of a good in a consumers budget. More details on these factors are explained in the Week 3 Wrap-Up announcement and on pages 178-179 of your text.
-Accurately assess how the price elasticity of demand impacts the firm’s pricing decisions and revenue growth, using research to illustrate claims (see italic text in the sample paper). See the previous DB post (titled Milestone Two Tips on Critical Element “Price Elasticity of Demand: Pricing Decisions”) for further detail on how to write this section.
I really recommend narrowing your focus to one product or type of products when discussing elasticity of demand, particularly if you selected a firm that creates a diverse product line. For example, if you have chosen Apple as your firm, I would recommend discussing the elasticity of one product line such as the iPhone or the iPad.
Below is a sample paper on the price elasticity of demand for chocolate. Note that the formatting of this example is only to show you how the critical elements are met. Please do not bold, underline, or italicize the different elements on your paper.
Price Elasticity of Demand
A shortage in the supply of cocoa would have a significant impact on the confectionery market and its input costs leading to a major shift in retail pricing for chocolate. As a result – without a reasonable substitute for chocolate, consumers craving the taste for chocolate will not be able to replace the desirable treat for another confectionery product making the demand for chocolate inelastic. However, there are many different types of chocolate products available for purchase that can be substitutes. When we narrow the market, we know that if a particular brand of chocolate goes up in price then the consumer could substitute their choice by switching to another brand making the demand for the brand of chocolate elastic. The “biggest fear surrounding the chocolate industry right now it that the supply situation leads to further retail price increases which creates conditions where chocolate is seen as a luxury” (Maduri, 2014). When a product is viewed as a necessity such as; gas, milk, or bread - the quantity demanded would not change in response to price fluctuations. But when a product is seen as a luxury, the price change would influence the quantity demanded as consumers with less disposable income would do away with the purchase all together. The possible thought behind this fear is that chocolate once viewed as an affordable treat could now be considered too expensive by the average consumer, which cause the demand for chocolate to become more elastic (Maduri, 2014).
As an example, in 2012 - Hershey “increased its prices on products by 6% on average, which resulted in a 2% increase in sales volume, a 140 basis point increase in gross margins, and a 14% year-over-year increase in EPS” (Asad, 2014). For Hershey in 2012, the price increased by 6% and the change in quantity demanded did not decrease by more than 6% (it actually increased 2%), which indicates that consumers are less sensitive to price changes and that the demand for Hershey’s chocolate is inelastic. This is supported by the idea that consumers consider chocolate to be a necessity and that it currently makes up a small enough part of the average consumer’s budget to make price increases less noticeable.
Since 2012, chocolate retail prices have increased by 60%, prompting Hershey to implement a pricing strategy focused on consumer responsiveness (Maduri, 2014). To diminish the shock of rising retail prices, Hershey gradually increased the costs on its retail products by adding a certain percent over time in order to avoid interruptions with consumer demand. By incorporating this strategy, consumers continued to buy their brands instead of avoiding the purchase altogether leading to increased sales and revenue growth over the last couple of years (Maduri, 2014). In recognizing the impact the supply cost of cocoa would have on their input costs, Hershey was able to sell their products by gradually increasing the costs by a certain percent over time to its retail products making the consumer view the demand for the product still affordable. This pricing increase had a positive impact on revenue due to the inelastic demand for chocolate. If the demand of chocolate were to become elastic as time passes, then Hershey may want to adjust its pricing strategy to avoid experiencing a decline in revenue from raising prices.
References
Maduri, F. J. (2014, November 21). Why chocolate prices will continue to rise - UPI.com. Retrieved from http://www.upi.com/Top_News/Analysis/Outside-View/2014/11/21/Cocoa-crunch-The-worldwide-chocolate-shortage/3631416423327/
Asad, F. (2014, June 26). Hershey Is Moving to Secure Its Future. Retrieved from http://www.fool.com/investing/general/2014/06/26/hershey-is-moving-to-secure-its-future.aspx
Comments
Post a Comment