Olha in Economy

To extend my knowledge in elastic demand I was analyzing three articles published in Globe and Mail regarding that topic.

There is a science in the part of pricing the product right to get the most in the revenue. And it is tricky as the price change can have totally different result depending of the elasticity of the market.  For example in the article the U.S. market is compared with Canadian market. The U.S. market is more elastic because more companies are competing with each other there and as a result more substitutes are available. Another example is the underestimated revenue. If the prices are too low and the demand is still high we are losing the revenue. ¹

 That is because the demand curve for the product can be elastic at the upper top, unitary elastic close to the center and inelastic at the lower bottom part. Actually when the curve is unitary elastic the revenue is the highest. It can be shown by graph 1 Demand curve and graph 2 Revenue curve.

Graph1 Demand curve

Graph 2 Revenue curve

Please note that the revenue is the highest at the unitary elastic demand point.

Next let’s look at another example. In the article “Our peak oil premium” Professors Murray and King show that since 2005, world oil supply has become far less responsive to increasing demand – in econo-speak, its price elasticity has fallen sharply. “As a result,” they write, “prices swing wildly in response to small changes in demand.” There is the example of inelastic demand for oil where the small fluctuations in the quantity  demanded from  Q1 to Q2 can cause a big changes in the prices from P1 to P2. The oil doesn’t have the substitutes and this contributes to the inelastic demand curve E1.

Opposite example is the market demand for potash. In the article “A bumper year for crops, a rocky patch for Potash shares”  as an example of elastic demand curve we found the following :“ While the potash oligopoly can try to keep prices artificially high in a falling grain price environment, farmers are savvy buyers of crop inputs and their potash demand can be sufficiently elastic to eventually bring potash prices more in line with other [agricultural]commodities,” Mr. Winslow wrote in a report last week. That is illustrated by elastic demand curve E2 on the Graph 3 where big changes in the quantity demanded from Q3 to Q4 changes the price from P3 to P4 mostly as a result of substitutes from other countries.

Grafh 3