Price Elasticity of Demand (Mathematics & Economics Essay)

Price Elasticity of Demand
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Price Elasticity of Demand
Introduction
This paper aims to analyse critical concepts relating to the decision making in the marketing and price elasticity of demand. Initial part compares the goods in terms of elasticity to price changes followed by a discussion on the benefits of marginal analysis for decision making. Next sections give coverage to the benefits of opportunity cost, which segues into the debate about the extensions of the benefits of optimized decisions for consumers, producers, and society.
Comparison of Elasticity between Two Goods
The elasticity of demand is the change in the demand in response to a change in the price (Pettinger, 2017). The mathematical formula to evaluate the elasticity is provided as under:
Price elasticity of demand = %change in the quantity of demand/%change in price
Two products being compared in this section include speciality coffee and soda drink. Speciality coffee is a highly inelastic good as, unlike black coffee, it is not exposed to the threats from substitutes (Jones, 2015). Only specific brands can maintain a unique taste that is addicted. Besides, the consumers of speciality coffee come from an affluent background implying that price increments are unlikely to affect their purchasing power (Jones, 2015). However, the soft-drinks market is marked with intense competition. If a producer increases the price, consumers may shift to another competitor with a lower price (Guerrero-López et al., 2017). Therefore, a soft drink is a highly demand-elastic good.
For instance, if the price of speciality-coffee and soft drink rises from $25 to $30 (a 20% increase), the demand for speciality coffee will decline by 2%. Contrarily, demand for the soft drink it may plunge as much as up to 20%.
Impact of Marginal Analysis on Decision Making
As the term implies, marginal analysis refers to the comparison between the benefit and cost that each additional unit of something produces. The addition remains viable as long as benefit continues to exceed the cost. However, where the cost of an additional unit outweighs the benefit, it serves as a red-signal against further consideration (Lakmal, 2014). Even though sunk costs do not reflect in marginal analysis, entrepreneurs, marketers, and managers regard it as a highly beneficial tool enabling them to optimize their decision (Lakmal, 2014). It helps in decision making relating to expansion to new markets or increasing the scope of the production (Lakmal, 2014). The businesses can consider further expansion when the cost of reaching the next level of size is lower than the incremental cost resulting from such expansion. In this way, marginal analysis enables businesses and people, in general, to be mindful of their limits and able to utilize their optimal potential by capitalizing each opportunity and avoiding unnecessary costs.
Importance of Opportunity Cost to Decision Making and Trade
Whereas marginal analysis is broadly concerned with whether or not considering the o...