Saturday, May 21, 2011

Why elasticity concepts may have limited use to a firm?

Why elasticity concepts may have limited use to a firm?
1. Time lag between calculating elasticity figures and incorporating them into pricing decisions.
2. The values are often only estimates, not exact figures
3. Need to account for the cost of production as well since profit maximisation is assumed to be the main aim of the firm.
4. Lowering the price of the good to increase demand cannot be a long term strategy
5. Maintaining customer loyalty is a way to minimise fluctuations in the demand for a good.

General Essay Techniques 1 (elasticity)

General Essay Techniques 1
Answering Essay Question involving Elasticity Concept

Example Question: Explain the concept of price elasticity of demand and income elasticity of demand.

My insights: Questions regarding elasticity concepts are common. There is a certain set of requirements for such questions to enable a student to score high marks in it. All I have provided here is a general guideline to help students score. Of course, if the essay question is asked in a certain context, students will need to take the context into account. In such cases, best students would use examples relevant to the context given when answering the question.

General Outline

1. State definition and formula:

Example: PED measures the degree of responsiveness in quantity demanded with respect to a change in the price of the good itself, ceteris paribus.

2. Explain significance of sign.

Example: PED will always have a negative sign due to the law of demand.

Example: YED can have both positive and negative signs. What type of goods does each sign represent (normal, inferior, complement, substitutes)? Include examples.

3. Comment on the magnitude of elasticity value.

Example: Evaluate the magnitude of YED (>1/<1). What types of goods does it represent (luxury, necessity)? Give some examples of goods with such magnitude (e.g. rice, branded bags... if a context is given, use examples relevant to the context)

*You can also use arbitrary values to help in the illustration e.g. 1% increase in price can lead to a more than proportionate fall in demand by 3%.

4. Remember to write a proper conclusion.

My insights: It is very important to take note of the argument keyword in the question. For this example question and example outline above, the argument keyword is “explain”. Hence it is simply a knowledge question that does not require much synthesis and evaluation. It does not require students to take a stand as well. (For a more detailed listing of the different argument keywords and requirement of question, refer to section on ‘argument keyword gummies’)

However, if the argument keyword is ‘compare’, a clear comparison is necessary.

Example: PED measures the degree of responsiveness in quantity demanded with respect to a change in the price of the good itself, ceteris paribus. On the other hand, YED measures the degree of responsiveness in quantity demanded with respect to a change in the income of the consumer, ceteris paribus.

Example: PED will always have a negative sign due to the law of demand unlike YED which can have positive or negative sign.

That's all for this section. :)

Tuesday, May 17, 2011

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