Question

Think of products/services whose price elasticity has some sort of obvious seasonality. In particular, try to name a few products whose price elasticity (at any price) increases during the season (and the demand becomes most price sensitive toward the end of season); and few products which are most elastic at the start of season and become less price sensitive as time passes.   Based on the formula E(p*) = p*/p*-c , explain for each of the two categories whether you expect the optimal (profit maximizing) price to go up, or down, during the season. Does this behavior match what you see in real world?

Answer 1

1. The products whose price elasticity increases during season are given below:

a.Green Vegetables and Fruits: It is customary that price elasticity of green vegetables and fruits increases during winter season because of fall in the prices of these items but gradually at the end of winter season, as production of certain green vegetables and fruits decline, its prices start soaring making price elasticity of demand to fall.

b. Consumer durable items:

Certain consumer durable items such as refrigerators, TVs, Coolers and Air conditioners are offered with attractive discounts by the dealers during off seasons such as Winter and Rainy seasons, which makes price elasticity of these items to increase but as the time passes out, price elasticity of consumer durable items become more or less static. There are several factors for change in consumer behaviors such as tastes, preferences and income of the consumers and prices of the consumer durable items.

c. Dress materials: It is customary that demand of specific clothes increases during a particular season for example, demand for winter clothes such as jackets, wollen coats etc increases during winter season even if prices of those garments is high. Many garment shops also offer huge discounts on different clothing items during off season to increase the sale of garment items.

2. The goods which has constant supply in the market are perfectly elastic means demands of such items always remain more or less static irrespective of any price alteration. This mostly happens in monopolistic or oligopolistic market, where there are only one or very few firms controlling the entire market. The best examples are, Auto tyres, Lubricants, Paints and Cements.

3. From the given Price Elasticity function,

E(p^* ) = p^* / p^* -c where p^* denotes price of a item and c is a constant that depends on income, tastes, choices and preferences of the consumers. If p<c then price elasticity will be negative if c=0 then price elasticity will be equalt to 1 and if p>c then price elasticity will be positive. The above price elasticity condition applies for items with no or less substitutes such as rubber items, paints and lubricants and tyres.

The given behavior rarely match with real world because of very less monopolistic or oligipolistic condition.