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Economics concepts and application to Ford U.K.

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Economics concepts and application to Ford U.K. Define the concepts of a) price elasticity of demand, b) cross - price elasticity of demand, and c) income elasticity of demand. Explain why an understanding of these concepts would be useful to the car manufacturer Ford UK. Elasticity is the responsiveness of quantity demanded and supplied to changes in price, income or relative pricing. Three concepts of elasticity are Price elasticity of demand, Cross price elasticity of demand and Income elasticity of demand. This is critical for the conduct of many businesses. If for example firms increase their prices by a small amount this could lead to a large fall in quantity demanded and thus would be very bad for the firm. On the other hand if a large increase in price results in only a small reduction in demand then the firm could decide to stay with the increase as it may give an increase in revenue. Price elasticity of demand (PED) is the responsiveness of quantity demanded to a change in price. The formula for price elasticity of demand is PED = % Change in quantity demanded % Change in price Price elasticity of demand has an inverse relationship this means that if prices rise quantity demanded falls and vice versa. This also means that price elasticity of demand has a negative value. ...read more.


This is however unrealistic with the amount of complementary and substitute goods available in the motorcar industry. If however price elasticity of demand is equal to one it is said to be Unitary. This means a change in price will lead to exactly the same change in demand. As you can see a fall in price (p to p1) leads to exactly the same amount increasing I quantity demanded (q to q1). There are two special cases where price elasticity of demand could be perfectly elastic of perfectly inelastic. If a good or service is perfectly elastic the price elasticity of demand is equal to infinity. This is a very exceptional case as demand is infinite and there is no need to change price. If price elasticity of demand is equal to zero it is perfectly inelastic which means that a change in price will have no effect on quantity demanded. There are numerous factors which effect price elasticity of demand. Some of these are Availability of substitutes, Income and Fashion. Availability of substitutes, products with few substitutes, such as water, will tend to be quite price inelastic, as these products cannot be done without. Income, this will greatly decide the type of good or service you can consume. If a person's income rises of falls this could greatly affect the elasticity of some goods. ...read more.


A firm could use this information to their advantage. For example the car manufacturer Ford could try to alter the perception of its products, making the consumer see it's products as luxury goods would give them more appeal. This could be achieved through advertising and would mean that Ford could take advantage of higher demand at higher prices for the high-income consumer. During an economic boom there would be a substantial increase in demand as a result of this, however this may back fire on them if there was a recession, which would cause a massive decline in demand. There are certain goods that can be highly inelastic. This would mean that there would have to be a large increase in income for demand to be affected at all. A good example of such good might be basic goods such as vegetables. These types of goods do not really have any attractiveness and will only very slowly increase in a boom time. However these goods would not be affected in a recession. Inferior goods actually see a fall in demand as income rises. This could be a product with a bad reputation. Elasticity in the business world as a very wide and diverse use if handled properly. Firms could gain much to their advantage with knowledge of elasticity's and greatly maximise profits. On the other hand having no knowledge of elasticity's may lead you to make bad decisions. ...read more.

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