Significance And Causes Of Price Inelastic Supply

Published Date: 02 Nov 2017

Elasticity of demand is the degree to which price has changed with the change in demand for a product (BusinessDictionary, 2013). Inelastic supply is when the change in quantity is lesser than the change in price. (Amosweb, 2013)

SIGNIFICANCE & CAUSE OF PRICE ELASTIC DEMAND:

If the price changes of a product, the quantity demanded will change in the opposite direction. Hence, as shown in the figure below if prices of a product are increased, the revenue of the business will experience a downfall. However if prices are decreasing it would increase the revenue of the business. (Web-Books, n.d.)

Price elasticity of demand plays a vital role in business decision making. Managers need to have information regarding how to apply the concept to get the required information regarding the demand for the products that they sell and they should be able to recognize the factors that affect price elasticity. (Thomas, 2013)

SIGNIFICANCE & CAUSES OF PRICE INELASTIC SUPPLY:

When supply is inelastic, no matter how high or low the prices go it does not have any impact or effect on the quantity of the product sold, hence it only changes the price and total revenue of the firm. These products have a very short time so firms cannot arrange for supply in such short time, therefore the supply is always constant while the total revenue changes according to the change in demand of the product. A manager must know if its product has price inelastic supply or price elastic supply. (Lindema, 2002)

INCOME ELASTIC:

The demand is said to be income elastic or highly responsive to changes in income if the percentage of change in the quantity demanded is greater than the percentage change in income. Demand is said to be income inelastic, or not very responsive to changes in incomes when the change in the quantity demanded is lesser than the percentage change in income. (CliffsNotes, 2011)

SIGNIFICANCE OF INCOME ELASTIC:

Income elasticity is positive for superior goods such as vacations, higher the income will increase, more buyer will purchase the product. For inferior goods such as hamburger, the price elasticity is negative, so more increase in income will lead to less purchase of the product. When the economy is in recession, income elasticity brings loss in revenue by producing firms. (BusinessBookMall, 2012)

2. In making business decisions, what can be done to contain and reduce costs over the tactical and strategic time frames? What impacts do incremental (marginal) and sunk costs, and the learning curve, have in making business decisions?

Strategic decisions are long term in their impact. They affect and shape the direction of the whole business. A business can reduce cost through cost leadership from the generic strategies. Cost leadership gives a firm edge over competitors on the basis of its low cost. But low cost doesn’t always mean reduced price, but its aim is to maximize profits. If the buyers are more price sensitive then chances are that they will prefer low cost product over any other products. Also, the low cost strategy of the product should have attributes that are enough for attracting potential buyers.

A low cost leadership strategy works best when:

Price competition among rival sellers is especially vigorous.

The industry’s product is standardized or readily available from other sellers.

Most buyers use the product the same ways.

Buyers incur low switching costs. (MyStrategicPlan, 2012)

Tactical decisions help to implement the strategy and they are broken down into 4Ps (Product, Price, Placement and Promotion) (MyStrategicPlan, 2012)

Marginal Costs:

Marginal costs are costs that are incurred in making one additional unit of product. Marginal costs are highly linked with marginal revenues and companies seek to reach a production equilibrium because that is where the profit of the business is maximized. However, if an imbalance occurs company will experience economy of scale. (WiseGeek, 2013)

Sunk Costs:

Sunk costs are the costs which are incurred in the past. These costs are non recoverable and they can never return regardless of future events. It is opposite to opportunity cost because sunk costs are not avoidable costs. The only thing that can be done is to avoid the sunk cost when making decisions about various aspects in business, including strategies. (Schwalbe, 2007)

Learning curve

A learning curve is the concept which states, that the learning which occurs as a repetitive volume of production enables a firm to make the production better, efficient and much cheaper at lower unit costs. This concept is largely applicable. Learning curve helps in estimating the costs of projects that involve the production on a large scale or large quantities of items. This concept also applies to the amount of time it takes to complete the job, doing the same job repetitively will allow a person to do it much quicker than before. (Schwalbe, 2007)