Context
This week we will examine how the price elasticity of demand for an industry impacts a firm’s pricing. For this discussion, you assume the role of CEO of a hypothetical company. In anticipation of the upcoming quarterly disclosure of profits, you prepare your Board of Directors for the pressure that cost-push inflation is having on profits. There will be some erosion of profits.
Instructions
Choose one of the following hypothetical companies:
- American Home Builder, Inc. AHB is a residential construction company. AHB builds homes nationwide specializing in new construction targeted for the median price range in the various regional markets. The short-run industry price elasticity of demand is 1.35.
- Very Big US Auto. Very Big US Auto is one of the oldest and largest manufacturers of autos in the United States. Very Big US Auto has an international supply chain and is highly dependent on components manufactured abroad and assembled in the United States. Costs are rising in all aspects of production across the industry. Very Big US Auto is seeing inflationary pressure in everything we use: labor, materials, components, and computer chips. On the demand side, Very Big US Auto knows that demand is relatively elastic, with a price elasticity of demand of 1.2. The price elasticity of demand, post-pandemic, may have increased with consumers seeking more transportation options.
- 21st Education Inc. 21st Ed uses cutting-edge technology to deliver high-quality online education for grades 9-12. 21st Ed is a private corporation fully credentialed in all 50 states. 21st Ed encourages students to go at their own pace and to expand their horizons as they explore paths to careers and/or college. Staying ahead of the technology curve, providing maximum security for the network, and paying for top-quality educators are pushing up costs. 21st Ed operates in the private education industry with a price elasticity of demand of 1.0.
Post a Response
In your discussion post, address the following prompts within the context of your chosen healthy food restaurant of which you are the CEO:
- Is the demand curve for your product relatively elastic, inelastic, or unitary elastic? Demonstrate this for your company’s product by how much the quantity demanded will change if you pass on the 10% increase in cost. In other words, prepare a forecast showing by what percentage the quantity demanded will change if your prices are raised by 10%. You must provide calculations showing the percentage change in quantity demanded.
- Will firms in your industry pass on some part, most all, or none of the cost increase to customers? Why or why not?
- Speculate how a firm in an industry with a long-run price elasticity of demand of .07 would react to cost-push inflation.