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The price elasticity of demand is a measure of how responsive consumers are to changes in in the price of a product. It is calculated as the percentage change in quantity demanded divided by the percentage change in the price of the product. If consumers are relatively sensitive to changes in the price, then percentage change in the quantity demand will be greater than the percentage change in the price of the product. This means that the absolute value of the price elasticity of demand will be greater than 1, and this is called relatively elastic demand. If consumers are relatively insensitive to changes in the price then the percentage change in the quantity demanded will be less than the percentage change in the price of the product. This means that the absolute value of the price elasticity of demand will be less than 1, and this is called relatively elastic demand. If the percentage change in the quantity demanded is exactly equal to the percentage change in the price of the product, then absolute value of the price elasticity of demand is equal to 1 and this is called unit elastic demand.
Perfectly elastic demand refers to a situation where consumers are completely sensitive to the price, which means that an increase in the price will cause the quantity demanded to fall to zero. This is represented by a horizontal demand curve, and it implies a price elasticity of demand equal to infinity. Perfectly inelastic demand refers to a situation where consumers are completely insensitive to the price, which means that an increase in the price will not change the quantity demanded at all. This is represented by a vertical demand curve, and it implies a price elasticity of demand equal to zero.
In my opinion, the demand for auto parts is likely to be relatively elastic. This means that the percentage change in the quantity demanded is likely to be greater than the percentage change in the price. The reason I suspect this is because there are many different producers of auto parts, which means that there are many different substitutes for the parts made by AutoEdge, and this would tend to make demand relatively elastic. A second reason why I think that the demand for auto parts would be relatively elastic is that auto parts can be expensive, and higher prices products tend to have more elastic demand than lower priced products, all else equal.
What Happens if AutoEdge Raises Prices and Relocates to the US?
Elasticity is a vital model in economics. It’s used to quantify how responsive demand and/or supply is in reaction to other changes in inconstant, which in our case would be price. One of the first questions that Ingrid posed was, “would consumer demand be affected by AutoEdge’s decision to raise prices and to move operations back to the United States?” Price elasticity of demand (PED) computes the reaction of demand after an adjustment in price (Pettinger, 2016).
If price elasticity of demand results being greater than 1, than the demand is considered to be price elastic. This means that an adjustment in price is commanding a larger percentage change in demand. On the other hand, in would be considered inelastic if an adjustment in prices produced a smaller percentage and a decrease in demand. If we know what our PED is, it will help to guide us in the right direction as to if we are going in the right direction of increasing our prices. If demand is elastic, profits are produced by reducing prices, but if the demand is inelastic it is gained by lowering prices (Economics Online, n.d.).
Based on my opinion I believe that the elasticity for auto parts is considered to be relatively elastic. What this means is the percentage change in the quantity demanded of a product is greater than percentage change in its price (Nitisha, n.d.). Generally, in this case consumers will decide to move over to a new brand when they see price increases, but some consumers that are loyal to the brand stay regardless of the increase in price. We have several competitors out there currently that offer cheaper pricing but not the same quality in which we offer our consumers.
It is my belief that the auto parts industry is elastic and because of this it is not recommended to increase prices because it will not be increasing revenue. If anything, I believe that by raising prices there is the potential to see significant losses in revenues altogether. However, there are still alternatives that can be done to reach such objectives. Ingrid mentioned the possibility of relocating the manufacturing operations back to the United States. If this is a decision that has already been decided on I would advise that AutoEdge use this exciting news as a marketing and advertising tool to help increase the awareness of the brand. By spending the capital to increase the brand loyalty it helps to make the demand more inelastic, while helping to generate more revenue.