Price Elasticity of Demand

Price Elasticity of Demand

Q 1:

I bought a bottle of Fanta Orange soda yesterday. I would reduce my consumption of the product and eventually stop buying it if the price increased. The demand for Fanta Orange is price elastic because an increase in the price of the commodity would cause a decline in its demand and vice versa (Hubbard, Garnett, & Lewis, 2012). This characteristic of Fanta arises because the product has many close substitutes. Furthermore, Fanta is not a necessity. Therefore, it is easy to switch to products such as bottled water, coffee or fresh juice when the price of Fanta increases. I can stay without the product if it becomes too expensive.

Q 2:

As a store manager, I would not enjoy selling the Fanta Orange if the price of the product was on the rise. An increasing price of Fanta Orange would cause customers to switch to other affordable close substitutes such as fresh juice because the substitutes will equally satisfy the consumers’ need. The decline in the demand for the commodity would cause reduced sales and the total revenue because the company would sell reduced quantities of the commodity at a particular price.

Q 3:

 An increase in income would lead to an increased demand for Fanta Orange at the given price. Therefore, the income elasticity for Fanta Orange is positive. On the other hand, the cross-elasticity of demand is the relationship between the change in the quantity of a product demanded and the change in the price of substitutes or compliments (Bade & Parkin, 2015). For example, the demand for coffee, fresh juice or any another substitute for Fanta Orange will increase with the increase in the price for Fanta Orange. Therefore, the cross elasticity for Fanta Orange and its substitutes is positive.

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