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The demand of a product refers to the willingness and ability of the people to purchase that product at a given market price in a given time. The demand of a product can be presented in an x-y plane in which it is shown as a curve sloping from the left to the right. This behavior of the demand curve is due to the fact that the law of demand postulates that, if all factors are held constant, the higher the price the lower the demand.
The term elasticity of demand is used to mean the manner in which demand responds to the changes in the factors that influence demand (for instance, the price of the good and the income of the buyers). The price elasticity of demand refers to the response of demand to changes in price levels while the income elasticity of demand refers to the response of demand to changes in the consumer income levels. (McConnell, C., Brue, S, 2004).
This research paper evaluates the price elasticity of demand. The price elasticity of demand is expressed as a figure which has an economic meaning. The simplest method of calculating the price elasticity of demand is by dividing the percentage change in quantity by the percentage change in price. Depending on the value that the elasticity takes, it can be described as being perfectly inelastic, relatively inelastic, perfectly elastic, relatively elastic or unitary. Demand is said to be inelastic when, regardless of the price, the demand remains unaffected. Generally, the demand for foods is inelastic. For instance, the consumers will be willing to pay any price for a kilogram of salt. The shape of the demand curve of a perfectly inelastic good is a vertical straight line that is parallel to the y-axis while the value of the elasticity is zero.
On the other hand, an elastic demand is one where any changes in the price beyond what the consumers consider acceptable levels, will lead to a huge change in the demand. The shape of the demand curve of a perfectly elastic good is a horizontal straight line that is parallel to the x-axis. A perfectly elastic demand represents a case in which any slight increase in the price leads to dramatic fall of the quantity demanded to zero. If the demand is perfectly elastic, the value of the elasticity remains undefined. (Taylor, John B. & Weerapana Akila, 2009).
A unitary elastic demand is one in which the percentage change in quantity demanded is equal to the percentage change in price. The value of the elasticity in the case of a unitary elastic good is positive one (+1). The question that now arises is: What factors determine this responsiveness to price? The major factors that are involved are the availability of substitutes, the time over which the increase is imposed, and the necessity of the product. The more readily available the substitutes are, the more elastic the demand. If the product is a necessity, then the demand is likely to be inelastic.
Therefore it is very imperative that the sellers of various products should know how customers respond to price changes before carrying out any change in the prices. The effects of an increase in the price of a product are two fold: revenues may increase or the quantity demanded may decrease. The question of whether this increase in the price will yield positive or negative results will all depend on the elasticity of the product.
There are various ways of calculating the price elasticity of demand. The point-price elasticity of demand measures the elasticity at a particular point along the demand curve. The arc elasticity of demand measures the elasticity of demand between some two particular points along the demand curve. The third method of calculating the elasticity of demand is by using the price of a related product. This is called the cross elasticity of demand.
The cross elasticity of demand of complementary goods will be negative. Complementary goods are goods that are used together. For instance, bread and butter. On the other hand, the cross elasticity of demand of substitutes will be positive because an increase in the price of one product will lead to an increase in the quantity demanded of the substitute product. (Lipsey, Richard G. & Chrystal Alec K., 2007).
The following table shows the comparative prices of cell phones in
The table compares the prices of three cell phone models: Black berry curve 8320, Nokia N97, and Samsung I8000 Omnia II (Unlocked). From the table, it can be seen that Nokia N97 silver (unlocked) is an expensive cell phone but it has some excellent features. However the retail prices from one retailer may differ slightly with the prices from another retailer. The prices of the different cell phones are mostly pegged to their features. The Nokia N97 has a touch screen, a QWERTY keyboard, and 32GB of internal flash memory. It also has 3G supports, Wi-Fi connectivity, Bluetooth and a 5-megapixel camera.
In addition, the cell phone enables the user to re arrange the applications and has shortcuts to the web browser, the contacts, messages, and so on. The Nokia N97 has a task manager that allows one to manage its organization. The glider design is well built so that the phone has a firm feeling that can withstand frequent opening and closing. The keys are designed such that they provide a response to the user when pressed. In other words, the user is able to know that a specific action has been performed. For instance, after pressing the ‘okay’ button, it feels depressed thus signaling that that action has been performed. (Reardon, Marguerite, 2009)
The Blackberry Curve 8320 has many features similar to those of the Nokia N97.For instance both phones have the QWERTY keyboard, the WiFi connectivity, memory card slot, and a media player. However, while the Blackberry has a 2 mega pixel camera, the N97 has a 5-megapixel camera. It has a 64 Megabyte internal memory compared to the N97’s 32 GB. The cell phone does not have a slide design.
The phone notifies the user immediately a mail is sent to him. Even when the mails have documents attached to the texts, the user can still read them since the phone supports a range of file formats for instance Microsoft office and adobe PDF. The phone has very good light sensing mechanism that changes the color of the screen according to the intensity of light (Amazon .com).
The other cell phone that can be thought of as a close substitute to the Nokia N 97 is the Samsung I8000 Omnia II (Unlocked).The cell phone enables the users to take and view their photos using the 5 mega pixel camera. The cell phone has an ability to take high quality photos as well as record videos which can also be edited using the phone. With its high quality screen, it is possible to view it even under the direct sunlight. It has an 8 GB internal memory and a memory card slot of up to 32 GB in addition to Microsoft windows 6.1 professional.
From the facts provided above about the features of the three cell phones, it is clear that the Nokia N97 is more superior to the other two. This is perhaps the reason why the price the Nokia N97 is also relatively high compared to the prices of the other two phones.
Due to the availability of close and perfect substitutes, the price elasticity of demand for cell phones is elastic. Suppose that a firm decides to increase the prices of its cell phones, the customers will definitely look for other cell phones that can offer substitute cell phones. Nokia N97 is relatively new to the market but the sellers are offering it at a very high price. Since there are other phones that have similar features as the Nokia N97, Nokia Corporation may find it very hard to obtain customers for this product. Unless a customer is very loyal to the Nokia N series, very few customers may be willing to part with a whooping $ 700 to purchase a cell phone while they can obtain an almost similar phone at much reduced prices.
Though the Nokia N97 is offered at a very high price, most of its features are also inferior to other phones. In particular, its touch screen is not very good while its operating system is quite outdated.
The other reason that makes the cell phones to have an elastic demand is the fact that the buyers have perfect information regarding the cell phone industry. In a situation where the buyers do not have perfect information regarding the prices at which the substitutes are being offered, the sellers can raise the prices of their products without affecting the demand. However, in the case of mobile phones, the market players operate in perfect market where the buyers and sellers have access to information regarding the products and the markets.
Since the cell phones cannot be classified as necessities either, their demand is likely to reduce once there is a price increase. With the advancement in technology, people are now using their laptops more than the cell phones. There are various kinds of portable laptops that people can use to send and receive electronic mails. This fact, therefore rules out the possibility that the cell phone vendors could raise prices and still increase their revenues.
Having closely examined the cell phone industry, the question that comes to the mind is: Is the demand relatively elastic or perfectly elastic? Perfectly elastic demand would mean that a small change in the prices of the cell phone would lead to a drop, to zero, in the quantity of cell phones demanded. Relatively elastic demand for cell phones implies that a rise in the prices of cell phones would lead to a more proportionate drop in the quantity demanded. For instance, if the Nokia N97’s price was 10%, the resulting drop in the demand for Nokia N97 would be more than 10%. The cell phone vendors usually fix the prices based on the cost of producing the good as well as the perceived value of the phone.
To determine whether the demand is perfectly elastic or relatively elastic, one would need to study the behaviors of the mobile phone vendors and that of the buyers. Nokia Corporation for instance, has always priced its new products highly but still it continues to attract customers. However, as time progresses, the prices of the products are lowered since the buyers start looking for the substitutes. This is called price skimming and involves initially pricing the product quite highly and then reducing the prices as the product’s life cycle nears maturity. Price skimming strategy does not allow the sellers to further raise the prices during the product’s lifecycle.
The demand elasticity can be said to be relatively elastic in the short run but becomes perfectly elastic in the long run. The short run is that time frame in which not all factors can be varied while the long run refers to the time frame during which all the factors can be varied.
In conclusion, having noted that the elasticity of demand for cell phones is relatively elastic in the short run, the phone sellers cannot raise the prices without a reduction in the quantity demanded. Any raise in the price will lead to a fall in quantity demanded and probably, a fall in the revenues earned. For this reason, the price of Nokia N97 should not be increased further, but should instead be reduced to a level that is relatively higher than that of the substitutes.
Since the Nokia N97 already seems over priced, I would recommend that the price be reduced so as to stimulate demand and earn more revenues. An increase in tits price would lead to loss of revenues due to reduced demand.