Question

1. In relation to croissant producers, is demand for butter price elastic or inelastic? Provide 3 reasons with explanation to support your answer. Based on your conclusion, will butter producers be better off now or when the price is lower in the future? Explain your answer by relating total revenue to elasticity concept.   

Answer 1

Butter is a major ingredient of croissant. Hence if its price is increased, the croissant producers still buy the same quantity unless there is a very steep rise. This shows that larger price increases have smaller influences on quantity demanded for butter. So demand for butter is price inelastic for croissant prodicers. Secondly there are no substitutes of butter to swtich to. Due to lack of substitutes, demand is inelastic. Thirdly the current recipie involves a major role of butter so that in the short run demand for butter is inelastic.

Based on this result, if the price of butter is reduced in future, it will be disadvantageous for the producers because for inelastic demand, higher price increases revenue and lower price will reduce revenues for croissant producers. In this sense, because demand for butter is inelastic, a lower future price would reduce revenues.