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Use the concept of elasticity as applied to demand, supply, and income to explain why firms may have different pricing strategies and why they may react differently to a price change by a rival Use real world examples to demonstrate your answers - Essay Example

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It measures the degree of responsiveness to a change. Price elasticity calculates the change in demand with a unit change in price (Marshall, 1890). In an economic system, every firm wants to maximize its…
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Use the concept of elasticity as applied to demand, supply, and income to explain why firms may have different pricing strategies and why they may react differently to a price change by a rival Use real world examples to demonstrate your answers
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Use the concept of elasticity as applied to demand, supply, and income to explain why firms may have different pricing strategies and why they may react differently to a price change by a rival Use real world examples to demonstrate your answers

Download file to see previous pages... They are price takers and cannot change it. If a firm raises the price of its product, the demand for its product lowers immediately. Also, the competitors do not bring any change in their prices. The little portion of demand that the firm has prior to the change in price gets redirected to the competitors. The firm ends up earning no excess profits at all (Samuelson, 1948). Therefore, the firm has to lower the price again. When the firm lowers the price of its product, it experiences an immediate rise in demand. But this increase in demand is very short-lived because the competitors react quickly by lowering their prices too. Therefore, all the firms end up earning less income than before. This is why price remains static in a perfect competition. It is difficult to find absolute examples of perfect competition in the real world but there are a few possible approximations (Kreps, 1990). Fish markets are believed to be perfectly competitive but Graddy found out that it might not be true (1995). But her findings are limited to Fulton Fish Market in New York and they may not be applicable generally. Vegetable and fruit vendors can also be regarded as operating in a perfectly competitive market. Such sellers sell very close to each other and a buyer can easily go to another seller if one seller charges higher. If a seller charges lower, it is very easy for other sellers to find out. Therefore, they also lower their prices at once.
In a monopolistic competition, the producers differentiate their products through various methods so that the products do not become perfect substitutes for each other (Roberts, 1987). An MC firm has the ability to control its share of the market and is a price setter. However, the demand for its product is still very elastic. It can raise its price but the excess profits are often short term. The consumers realize that they can substitute the product of the firm. This is why an MC firm ...Download file to see next pagesRead More
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