Price Elasticity

Price Elasticity Scenario

The law of demand tell us that consumers will buy more of a product when its price declines and less when its price increase (McConnell & Brue, 2008). The reaction or sensitivity of consumers to a price change is measure by product elasticity of demand. In other words, it measures the change in the quantity demanded relative to a change in price for a good or service.

Carlos Cruz is an inventor who is also an enterprise individual. He is convince that in the near future everybody will be reading or listening to everything digitally, including all great books that have been available in hardcopy. He planned on concentrating in the development of audio book, which will become his business. Of course he knows that there are books out there on CD already, but they are expensive, plus they sound somewhat inhuman. Carlos plans on creating a new one and recording the voices himself or hire personnel to do the recording.

Carlos has done a lot of research to get to know his business, so he was determined and decide how much he was going to earn if he distributed audio book online using his website and selling old books translated into audio and new books taken from the supplier and design combined.

He needs to be aware of how much production is taking place on regular basis. If the demand increases, then he can consider employing another person for $10 an hour in Puerto Rico was he can supervise and with the skill to manage and train others to do the job as business expand.

During the first few month he found out that the new books sold 2000 pieces while the old book sold 1000 pieces, and the more expensive audiobooks gather more sales.

In these case price elasticity can help him with his decision in order to calculate a projected estimate in his business. Prices elasticity of demand can measure the change in price and quantity in order to create good prediction of demand. Old audio books have demand of 1000, while new audio have a demand of 2000. Carlos can use the simple formula to calculate the elasticity of demand suppose he increases the price of the old audio book. This will be a projected computation and will let Carlos presume that there’s an increase in demand of 100%.

He needs to look at his total fixed and variable cost to make sure they have not increase, because fixed cost can stay the same but variable may increase. This cost can be Internet, supplies, wages and services.

When the price is more than 1 the elasticity is positive and consequently recommended or increase the price of the product in order to gain more sales, this assuming that’s the price because the quantity of demand still need more market research and testing in order to understand its price in the market. The law of demand establishes that as price increase, the demanded amount increase, because consumer doesn’t want to pay higher amount and will other products.

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