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Demand and Price Elasticity of Demand - Case Study Example

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The author states that there is a bad year for the investors of wine and the merchants of Bordeaux are unable to sell over half the vintage of 2007, that is considered to be overpriced and poor. This means that for the 2007 vintage to be sold, there is a need for reducing the price of the commodity. …
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Demand and Price Elasticity of Demand
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Download file to see previous pages According to the article, a drop in the price for Bordeaux wine could increase the sales. This strategy is explained by the price concept of demand elasticity. Whenever a firm comes up with a pricing strategy it needs to analyze all the outside factors which affect the firm’s decisions. These factors may include the consumers and market competition among other factors. Considering the price strategy that is demand-based, the market would always set out a price for a commodity after researching the desires of consumers and verifying the price range which is acceptable to the market target. In the case of Bordeaux, the consumers had proposed a low wine price. This implies that reducing the price of the wine will make the commodity be more affordable to the consumers (Sheffrin, B. 2003). This would increase the demand for the product thus increasing its supply. Increase in the supply of Bordeaux wine would increase the number of sales.
Price elasticity of a commodities demand involves a measure that is used in economies in showing the elasticity responsiveness of the quantity of the product that is demanded towards a change in the product’s price. In this respect, it provides the percentage change of the quantity of the product that is demanded to follow the response to a change in the price. Price elasticity can be considered to be negative despite the fact that analysis would always ignore the negative sign leading to ambiguity (Peters, K. 2006). Positive price elasticity of demand occurs in a case where the products do not satisfy the law of demand. In this respect, the demand for the wine would be said to be inelastic when the price elasticity of demand (PED) is below one. This implies that the price changes have a significantly smaller effect on the amount of wine that is demanded. On the other hand, the demand for Bordeaux wine would be said to be elastic whenever the price elasticity is more than one. This means that the changes in the commodities price would greatly influence the amount of wine that is demanded.
In the case of Bordeaux wine, the demand for the product could be said to be elastic. This is so because the demand for this wine is strongly affected by changes in price. Therefore, increasing the price of the product would reduce the demand for the product whereas reducing the price of the product would have an effect of the increasing demand of the product (Knugman, R. 2005). It is for this reason that the merchants who were contacted through The Times argue that they could only accept the wine when the price of the wine is reduced to about ₤95 in 2008 for the best brands compared with the ₤318 in 2007 vintage (Sage, A. & Pavia, W. 2009). These investors argue out that when the price of wine is higher than the proposed one, there would be no customers. This is a clear indication that the demand for Bordeaux wine was elastic.
The graph represents the quantity of the wine that is demanded as the variable that is Independent (x-axis) and the price as the variable that is dependent (y-axis). According to the law of demand, the quantity of the product that is demanded will always move towards the opposite price direction. This is observed in the graph above through the downward demand curve slope. When one moves along the curve, a change in the price of the wine would result in a change in the quantity that is demanded.  ...Download file to see next pagesRead More
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