Essay Sample on Evaluation of Demand Elasticity

Introduction

The price variation is trivial in a market economy and very frequent in retail, mainly in the supermarket sector. When the quantity demanded by a product is greater than the supply available, prices increase. In these cases, if the costs per unit prices remain constant, the price increase leads to an increase in profits and to an incentive to invest in the production/sale of a larger quantity of the product. Prices investments can also be stimulated. On the other hand, if supply is higher than demand, there will be pressures to reduce prices and, consequently, the production/sale, leading the bidders to direct their resources to alternative uses.

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Perfect market knowledge is one of the key factors Company that wants to be successful. When thinking of any expansion, or even when launching a new product, the company cannot leave out important variables such as the level of income, customs, tastes, climate, age composition of the population, and even fashion, which, combined with the influence the consumer's purchasing decision. It is true that goods are sought because they have utility, but it is not certain that everyone who thinks a useful product will buy it. Not all demand is expressed as market demand. Although almost everyone wants a country house, few have the money to buy it. The effective demand is composed of those who associate with the desire to possess a buy it and make that purchase effective.

The demand for the good increases as its price goes down, that is, demand is "sensitive" to a low, or price increase. But the degree of sensitivity varies from product to product, and although it is not very easy to discover the reasons for the difference in price sensitivity, of the various goods, it is whether or not a product satisfies the utilities. Thus the insensitivity to price variation, of a product like salt, is explained by the fact that it is indispensable to man, and has no substitute.

The price level to be stipulated for a product depends on several factors, but a factor especially important refers to what the market would be willing to pay. The consumers are more or less sensitive to changes in the prices of products depending on certain variables, some of them analyzed in this article. This sensitivity of the consumer to prices is called price elasticity which is one of the most studied in marketing for the "price" component of the market compound. Perhaps because the high inflation rates of the 1970s and 1980s contributed to disorganize the relative prices of the products, causing the price to lose importance as an element of marketing. Another reason would be the low availability of data scanned by the end of the 1990s, data which are very useful in estimating the price elasticity for consumer goods. After reviewing in the annals of 1996 to 2003 of the Meeting of the National Association of Graduate Programs in Administration (Enanpad), no article on price elasticity variation between customer segments was found. The objective of the article is to estimate, through the use of printed data from internet sources, the price elasticity for coffee brands and verify that their magnitude is influenced by household characteristics, such as brand loyalty, income level, frequency and intensity of purchase in the category.

The variation in prices of non-preferred brands at home does not influence the decision of the purchased quantity of the preferred brand, that is, the brands show a low elasticity of demand. Households loyal to a particular brand are more sensitive than non-brand loyalists. This, therefore, has a great impact on the demand elasticity of the coffee brand in question.

Relative Price Comparison

Demand analysis is made to identify the needs of the users and determine how much they are willing and able to pay to earn output products. Hence, size, condition, and demand for the product are important. The relative price is the relationship between the prices of two or more products. If, for example, in a given period the price of bread remains stable and that of chicken rises 20%, then we say that the relative price of chicken with respect to bread increased 20%. The Consumer Price Index (CPI), used to measure inflation, takes into account a diversity of prices of goods and services that reflect the cost of living. However, not all prices vary in the same way and, therefore; the relative prices between different goods and services vary over time, for different reasons. In this issue, we analyze the evolution of some relative prices during the last two decades. In the table below, several alternative products have been analyzed considering the closeness and mutual relationship amongst the products. The table shows the prices of three r brands of coffee in the US in different stores.

Location Sub.1Product Your Product Sub.2Product Sub.3Product

Cafe Du Monde Costa coffee Starbucks coffee Mc Cafe Tim Horton's

Starbucks $0.06 $0.059 $0.06 $0.061

Four Barrel $0.061 N/A $0.062 $0.063

Blue Bottle N/A $0.06 Sub 2 Price N/A

Analysis

Relative price is applied when gauging relative strength critical in stock selection. The performance of any given business organization is gauged with reference to the stock showing relative strength. Relative price rises when there is improved relative strength of a given product. Products develop their popularity within the consumers, which results into a direct increase in demand. When the price if consumer-friendly, the sales increases increasing the demand, especially if it is a basic product.

In the table above we present the relative prices in relation to the dollar of the main coffee brands: Costa coffee, McCafe, and Tim Horton's compared to the Starbucks coffee brand. The values of price elasticity indicate that the quantity purchased is negatively related to the with the price level. The cross-elasticity is not significant, indicating that the variation of prices of non-preferred brands at home does not influence the decision of the quantity of the preferred brand. Loyalty to the brand, frequency of purchase and intensity of purchase are the variables that influence the magnitude of price elasticity for most brands, those with the largest market share within the analyzed supermarket chain. The income variable, in the way it was operated, is not significant in the explanation in the variation in elasticity between groups of households. These indications may be useful for managers of supermarket want to estimate the price elasticity for the various customer segments.

The price elasticity analysis is made with assumptions that the other elements remain constant. This procedure cannot be applied to other competitive processes. Measuring these processes requires knowledge of advertising costs, product quality or service. Elasticity correlates with the ability to obtain goods or services. Thus, an improvement in product quality makes this product more elastic. This will no longer be true if it becomes a more difficult replacement of this product. When a product gains application versatility, the possibilities of substitution of this product increase and. therefore, the elasticity also increases. Advertising, another element of competition, tend to increase the possibility of product substitution and, at the same time, emphasizes the most product. With more advertisement, more buyers are influenced by buying the advertised products. However, the advertising process may reach a saturation point where the effect of the adverts is no feeling anymore.

It could be said that as the majority of the potential buyers are reached by advertising, it makes it possible to persuade new individuals to buy products or services it claims. The measure of its success is given by the sensitivity of the population.

Thus, combining the variables of competition and the elasticity of the good, it can be said that the price elasticity acts negatively and the other variables of competition. That is, the quantities sold decrease when prices but not when the quality, publicity and/or complements offered by the company are correctly used. It is therefore very clear that operating in a competitive market, a simple price elasticity analysis will mean little, if not considered the other elements that interact with it, in the task of winning customers to the products of a particular company. The variation of any of them will affect all the others. Thus price elasticity assumes greater importance in the eyes of consumers, the "elasticity of quality, advertising and services" declines immediately. If quality comes to dominate, the price elasticity of the product does not mean so much, and thus with all the other elements, and must, therefore, not leave them alone in any market study, new product launch, or for an increase in current sales.

Conclusion

The global message that our analysis leaves us is that the economic status has adequately managed the inflationary impact caused by the behavioral consumption changes. However, the same cannot be said about the performance of regulatory bodies. The work of these organizations is to make different markets for products and services more competitive (fewer monopolies and less price control by the State). The Central Bank's dilemma is how to continue with its policy of de-dollarization of the economy and, at the same time, solve the problem of exchange rate backwardness in order to make our exports more competitive and allow our manufacturers to better face the invasion of imported products.

The price elasticity of a product can be defined as the relative change quantity of a product, due to a relative price. Generally, elasticity is demonstrated in the form of a 1% variation, ranging from zero to infinity. So we have:

Ep = 1: it is said that the good has unit elasticity

Ep> 1: it is said that the good is elastic

Ep <1: it is said that the good is inelastic

At the zero limits, the graphic representation of the demand for the good would be a vertical straight line, parallel to the axis of the ordinates (price), representing a perfectly inelastic good. In the infinite limit, we would have a straight line horizontal, parallel to the axis of the abscissa (quantity), representing a good perfectly elastic. For unit elasticity, the graphical representation would be a rectangular hyperbola, with elasticity equal to 1, at any point on the curve.