Ans elasticity of demand refers to consumers

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ANS: Elasticity of demand refers to consumers’ responsiveness or sensitivity to changes in price. ELASTIC DEMAND occurs when consumers are sensitive to price changes. The demand curve is al- most horizontal or exactly horizontal if demand is perfectly elastic. INELASTIC DEMAND means that an increase or a decrease in price will not significantly affect de- mand for the product. The demand curve is almost vertical or exactly vertical if demand is perfectly in- elastic. UNITARY ELASTICITY exists when the increase in sales exactly offsets the decrease in price so that total revenue remains the same. PTS: 1 REF: 300 OBJ: 19-3 TOP: AACSB Communication | TB&E Model Pricing 8. List five factors that affect elasticity of demand and briefly describe how each affects demand. ANS: AVAILABILITY OF SUBSTITUTE GOODS AND SERVICES. When many product substitutes are available, the consumer can easily switch from one product to another. This makes demand more elast- ic.
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PRICE RELATIVE TO A CONSUMER'S PURCHASING POWER. Low price relative to the pur- chasing power of the consumer results in relatively inelastic demand, as long as changes in price are perceived as inconsequential. PRODUCT DURABILITY. Durable products last a long time and often offer the consumer the option for repair rather than replacement. This results in elastic demand. PRODUCT'S OTHER USES. The greater the number of product uses, the more elastic demand will tend to be. As price varies for a product with a wide variety of applications, substitutability becomes an issue. RATE OF INFLATION. Recent research has found that when a country’s inflation rate (the rate at which the price level is rising) is high, demand becomes more elastic. In other words, rising price levels make consumers more price sensitive. PTS: 1 REF: 301 OBJ: 19-3 TOP: AACSB Communication | TB&E Model Pricing 9. Explain yield management systems (YMS) and discuss the types of industry where they are most ap- propriate. ANS: Yield management systems are a technique for adjusting prices that uses complex mathematical soft- ware to profitably fill unused capacity by discounting early purchases, limiting early sales at these dis- counted prices, and overbooking capacity. YMS are used to raise prices to maximize revenues. They were first used in the service industries—specifically the airline and lodging industries—but have been recently discovered by manufacturers as a way to make more efficient use of resources. PTS: 1 REF: 301-302 OBJ: 19-4 TOP: AACSB Communication | TB&E Model Pricing 10. What are the problems associated with the use of a cost-based pricing strategy? What contribution does cost make to the setting of prices? ANS: Setting prices based solely on costs ignores demand and other important factors such as marketing mix components or consumer needs and wants. Prices determined strictly on the basis of cost may be too high for the target market, thereby reducing or eliminating sales. Cost-based prices may also be too low, causing the firm to earn a lower return than it should. Costs play an important role in price set- ting, however. Costs serve as floor below which a good or service must not be priced in the long run.
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  • Spring '10
  • Patterson
  • Supply And Demand, AACSB Reflective Thinking, TB&E Model Pricing

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