Answer to Question #97209 in Microeconomics for Usman Tariq

Question #97209
How to use income and cross price elasticity to develop pricing strategies in relation to consumer income, substitutes and complements?

How can total revenue be improved by understanding how elastic demand is for a good or service?

Explain how firms can develop strategies to access consumer surplus?
Expert's answer

a. The cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes.

substitutes products

The cross-elasticity of the demand for substitute goods is always positive because the demand for a product increases as the price of the substitute increases. For example, if the price of "seven up" increases, the amount of "sprite" demand (a substitute drink) increases as consumers turn to less expensive alternatives. This is reflected in the cross-elasticity of the demand formula, as the fraction (percentage change in demand for sprite) and the denominator (the price of a seven up) show positive growth.

Items with a coefficient of 0 are unrelated items and are goods that are independent of each other. Items may be weak alternatives, with positive but weak cross-elasticity of demand for both products.


Alternatively, the cross-elasticity of demand for complementary goods is negative. As the price of a commodity increases, the commodity closely associated with that article and necessary for its consumption diminishes as the demand for the primary good also decreases.

For example, when the price of bread increases, the demand for bread decreases and the demand for fruit jam also decreases. bread and fruit jam are complementary products

b.Elasticity is the extent to which individuals, consumers or producers modify their demand or the quantity supplied in response to changes in price or income. It is mainly used to evaluate changes in consumer demand following a change in the price of a good or service.

A product is considered elastic if the quantity demand by the product changes drastically when its price increases or this situation high effect on total revenue.

Conversely, a product is considered inelastic if the quantity demanded from the product changes very little when its price fluctuates.

in this situation a low effect on total revenue. For example, fuel is a very inelastic product. low price change made for the request. Because fuel is a high essential product.


Consumer surplus

Consumer surplus occurs when prices are lower than what they are willing to pay for goods. This is an additional benefit for consumers because they pay less than they would like to pay.

According to the graph, e is market equilibrium. "P1" price supply quantity "Q1" but consumer is willing to pay "P3"

There are 4 strategies

Price Discrimination- selling strategy that charges customers different prices for the same product ex. coupon, age /gender-based pricing

Two-Part Pricing- a form of pricing in which consumers are charged both an entry fee (fixed price) and a usage fee (per-unit price). Ex. Wi-Fi bill

Block Pricing-seller charges different prices for different ranges, or blocks, of output Ex. 10 unit $10/20 unit $17

Commodity Bundling- A firm that sells the same goods separately as well as in packages has adopted a mixed bundling strategy.

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