Demand and Price Elasticity of Demand - Case Study Example

? Demand and price elasti of demand Part A. 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 the 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 of 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 a 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). A positive price elasticity of demand occurs in a case where the products do not satisfy the law of demand. In this respect, the demand of 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 of Bordeaux wine would be said to be elastic whenever the price elasticity of is more than one. This means that the changes in the commodities price would greatly influence the amount of the wine that is demanded. In the case of Bordeaux wine, the demand of the product could be said to be elastic. This is so because the demand of this wine is strongly affected by changes in price. Therefore, increasing the price of the product would reduce the demand of the product where as reducing the price of the product would have an effect of 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 of Bordeaux wine was elastic. Part B. The amount of the wine demanded is normally a strong component of its price. A case study done to find out the quantity of the wine demanded at various price levels with all the other factors kept constant, would result into the table 1. Table 1. Demand schedule. year price Average price quantity 2002 95 95 170 133 700 2003 192 192 253 223 500 2004 141 145 190 159 600 2005 472 480 622 523 300 2006 450 450 622 536 200 2007 318 318 466 392 400 Graph 1. 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 into a change in the quantity that is demanded. Whenever there exists a change in the influencing factor besides price there could be a shift in the demand curve either towards the right or the left, whenever the quantity demanded is decreased or increased. For instance, if there is positive news concerning the wine, the quantity demanded of wine at each price could increase. This is shown by the curve making a shift towards the right as shown in the graph 2. Graph 2. There are different shift factors which may affect the demand of the Bordeaux wine. This implies that a change in one of these shift factors may lead to a shift in the demand curve. The first shift factor of the demand curve is customer preferences. Increase in the customer preference towards the wine increases the demand of the product thus shifting on the demand curve to the right. Reduced customer preferences to the product would reduce the demand of the wine thus shifting the curve to the left hand side. The second shift factor is the price of other related goods (compliments and substitutes). Increasing the price of complimenting products will lower the demand of the product thus shifting the curve towards the left side. On the other hand, increasing the substitute’s price would increase the demand of the wine thus shifting the curve towards the right side. The third shift factor is the income of the consumers. Whenever the income of consumers increases, the demand for the product would increase hence the demand curve would shift towards the right. The fourth shift factor is the population of the potential buyers. Increasing the market size or the population of the buyers would increase the demand of the product thus shifting the curve towards the right (Braeutigam, K.2005). The last shift factor is the price change expectations. When there is some news report which predicts increase in future prices of the product would tend to increase the current demand of the product as the consumers would increase the quantity of the product that they would purchase while expecting a price change. This would have an effect of shifting the graph towards the right (Fair, C. 2007). Part C. From the case study, there are a number of evidences that support the idea that demand for Bordeaux wine has shifted over the period. In the region, of Bordeaux merchants give a threat of boycotting wine from the chateaux that are expensive unless the vintners reduce the prices to levels of 2002 (Sage, A. & Pavia, W. 2009). This shows out that the consumers of the product are threatening to reduce their consumption. It also proves that the demand of the Bordeaux wine has shifted from 2002 due to the high price of the wine. Next, early reports argue out that the finishing wine in Bordeaux could be an excellent vintage. For Bordeaux vintners, this is not true since the financial thunderstorms following the past six months have reduced those individuals who felt that they were wealthy to drink chateau la mission at about 5,500 a case. This is a clear indication that the income of the consumers has reduced. A reduction in the income of the consumers would reduce the demand of the product since few individuals would be having money to purchase the product. This would have an effect of shifting the demand curve to the left side. Another situation occurs when the demand of the Bordeaux wine produce falters from October, whenever the prices for fine wine plunge by 40 percent. This is also an evidence of the shift in the demand curve as it demonstrates a change in price of other related products. Fine wine could be a substitute product for the Bordeaux wine. Increasing the substitute’s price would increase the demand of the wine thus shifting the demand curve towards the right side. Apart from this, other evidences of a shift in the demand curve include a bad year for the investors of wine and the fact that the merchants of Bordeaux had been unable to sell over half the vintage of 2007, that is considered to be overpriced and poor (Sage, A. & Pavia, W. 2009). This is a demonstration of a shift in demand since is displays a reduction in the customers preferences towards the product. When the consumers perceive the wine to be poor and overpriced it represents a reduced preference of the product. Reduced customer preferences to the product would reduce the demand of the wine thus shifting the curve to the left hand side (Hoffman, B. 2008). All these are evidences from the case study which displays a shift in the demand of the Bordeaux wine. Part D. There are different aspects that have taken the course in the demand of Bordeaux wine since this article was written. The table below (table 2) gives a representation of the wine price from the year 2002. Table 2. year price Average price 2002 95 95 170 133 2003 192 192 253 223 2004 141 145 190 159 2005 472 480 622 523 2006 450 450 622 536 2007 318 318 466 392 Table 2 represents the price for Bordeaux wine from the year 2002. In 2002, the average price of the wine was ?133. Comparing this price to the other years this is a slightly lower price than that of the proceeding years. This means that, in 2002, the demand for the wine, was relatively higher that of the proceeding years. Whenever the prices of a commodity are lower, the demand for such a product would always increase thus increasing the sales of the product. This is evidenced when the merchants who were contacted by The Times ague out that they would only accept the 2008 wines when the price of this wine is reduced to that of 2002 (Sage, A. & Pavia, W. 2009). In the 2003, the average price of Bordeaux wine increases to ?223. This price is more than that of 2002 but is still less than that of proceeding years. This implies that the demand of the product was high but not as high as that of 2002. The amount of sales in this year would be high though not as in 2002. In the year 2004, the average price of Bordeaux wine dropped to ?159. Just as in 2002, the demand for the wine was more than that of 2003. This is so because of the reduction in price from ?223 to ? 159. Reducing the price of the commodity would have an effect of increasing its demand (Adrian, J. 2006). This would also increase the number of sales of the product. In the year 2005, the average price of Bordeaux wine increased to ?523. An increase in the price of the wine reduced the demand of the product as only few individual could afford it. This leads to a lower amount of sales than that of the prior years. In 2006, the average price of the wine, was 536. This is slight increment in the price compared to that of the 2005. A slight increment in the price would lead to a slight reduction in the demand of the product thus slightly reducing the sales of the product. In the year 2007, the average price of the wine dropped to ?392. This is a substantial reduction in the price of the wine. The main effect would be increasing demand of the product and the number of sales (Neuman, Y. 2009). Therefore, in the year 2009 the prediction is that the price of wine would be lower than ?392. This is so because of the change in the market. From the article 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 a reducing the price of the commodity. References. Adrian, J., 2006. Instructor Microeconomics. New Jersey: Prentice-Hall. Braeutigam, K.,2005. Price elasticity. London: Jack and son publishers. Fair, C., 2007. Demand and Supply. New Jersey: Prentice Hall Englewood press. Hoffman, B., 2008. Microeconomics . New York: Addison publishers Krugman, P., 2005. Microeconomics. New York: Worth Publishers. Knugman, R., 2005. Microeconomics. New York: Oxford Publishers Neuman, Y., 2009. Changes in relative price distributions and demand curve. New York. Oxford publishers. Peters, K., 2006. Shift in the demand curve. New York: Oxford publikshers. Sage, A., & Pavia, W., 2009. Bordeaux vintners threatening with boycotts over higher prices. The Times, 7 march. P. 9. Sheffrin, B., 2003. Economic: Principle in actions. New Jersey 07458: Pearson Prentice Hall. Read More