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Demand for a good depends largely on price, household income and the price of substitutes or complementary goods

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Introduction

Table of Contents 1. Essay 2 2. Bibliography 7 3. References 7 This essay will argue whether the demand for MG Rover cars is likely to be elastic or inelastic. A variety of different arguments have been put forward about this issue. This essay begins with defining and explaining price elasticity of demand. It will then put forward reasons for arguing that the demand for MG Rover cars is elastic. Elasticity measures the responsiveness of one variable in response to another variable. . The more elastic variables are the more responsive it is to the changing market conditions. Demand for a good depends largely on price, household income and the price of substitutes or complementary goods. Changes in any of these will cause either a movement along the demand curve or a shift in the demand curve. Price elasticity of demand (PED) measures how much consumers respond in their buying decisions to a change in price. Price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. This is illustrated below: = Percentage change in quantity demanded Percentage change in price For example, if price increases by 10% and consumers respond by decreasing purchases by 20%, the equation will calculate the elasticity coefficient as being -2. ...read more.

Middle

For example, BMW have a reputation for being high performance, high quality, luxury vehicles and they have a price tag to reflect this. They are seen as status symbol goods and can be the result of conspicuous consumption. The company MG Rover was once owned by BMW until it was dispensed in 2000 (Auto Car Magazine 2005). This had an affect on MG Rover as it slowly lost its brand identity, thus selling its models at slow pace. This indicates that MG Rover cars are elastic demand as Richard Bremner (2005) stated that less than 50 new models, City Rover and MG SV were sold at cheaper price after BMW dispensed MG Rover. If MG Rover cars were inelastic then the change in price would not affect demand as much. Furthermore, inelastic demand is also believed to be necessity, therefore if MG Rovers were inelastic then demand would be high and there would not be slow selling cars. Factors that determine price elasticity of demand are the availability of substitutes, luxuries and necessities, the time period and the proportion of income spent on the good. Necessity goods are considered to be inelastic demand as consumers need it more and cannot find substitutes even when the price increases. This indicates that MG Rover cars are luxury cars therefore have more elastic demand. ...read more.

Conclusion

In order to raise the demand, MG Rover should decrease the price for cars which indicates loss in the short run but profit in the long run. In conclusion, it can be seen that MG Rover cars have more elastic demand than inelastic demand. This is because as the price of cars changes the demand also changes. Consumers would most likely demand less for a MG Rover as the price of the MG Rover increases. This can be seen as consuming less or substituting other goods. The more the demand decreases as the price increases, the greater is the price elasticity of demand. The consumer perception of the car is necessary for the continuing success of MG Rover. The brand must ensure quality at a reasonable price to satisfy the consumer's needs. The consumers nowadays are well educated and know exactly what they want; therefore, improved prices would benefit the consumers. Furthermore, in order to increase sales MG Rover should manufacture modern designs for different age groups. This is can be done by introducing features such as DVD players, and other electronic features. To increase demand, MG Rover would need to advertise in order to get a wider market share and more recognition by the consumers. By taking this approach their demand would not fluctuate as much. In general, if the price of a MG Rover decreases then the quantity demanded is expected to increase and therefore the price elasticity of demand would be negative. ...read more.

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