1

Microeconomics

Student’s Name 

University

Course

Professor

Date
 2

Microeconomics

The availability of substitutes; the specific nature of the goods available on the
market; the percentage of income spent on the goods; and the timing of when consumers
purchase specific goods and services are the four factors that affect the price elasticity of
demand.

Substitute goods

When the substitute for a good is easily available, demand for the good becomes elastic.
When an alternative product exists, demand for a good or service becomes more sensitive to
price changes. If the price of substitute goods rises, the demand for the good will rise;
however, if the price of substitute goods falls, it indicates that the price of the good should
fall in order to raise its demand.

Consumer Income

The income effect influences the elasticity of demand for goods and services. Consider a
recessionary economy in which many employees have been laid off. The majority of
people's annual incomes are declining. During this time, it is prudent to lower prices in order
to increase demand or to maintain current prices for goods.

Type of Good

Goods are classified into three types: necessities, comforts, and luxuries. Price changes are
unlikely to affect demand for necessities because they are typically inelastic. In this case, the
firm's decision to consider raising prices will be advantageous because it will result in
increased revenue. comfort and luxury goods typically have higher elasticities.

Time Factor

This implies that the time it takes for consumers to adjust to price changes for a product has a
significant impact on the price elasticity of demand. Over longer time periods, the price
elasticity of demand is higher. This is because consumers gradually adjust to new or changing
prices over time.

Negative Price Elasticity of Demand

When the price elasticity of the demand is -1.05 it means that the demand for the
product is inelastic. In this case, the price has a small effect on demand. The percentage
 3

change in price is larger than the percentage change in demand. As a result, when the firm
raises its price, demand falls by a smaller than price increase. This means that the firm's
revenue will rise. Therefore, I would advise the firm to raise the price because it will increase
its profit margin, which will increase the firm's revenue.

Cost-cutting Techniques

Cut production cost

The best way to reduce production costs is to look for ways to reduce material and
production costs. This can be accomplished by reusing leftover materials rather than sending
them to the recycling center. Also, think about how you can use your waste to make another
product. Centralize or consolidate production space by leasing unused space to another
business or individual.

Cut Marketing cost

This can be accomplished by looking for less expensive marketing alternatives.

Creating an e-mail list for your customers and implementing a referral program Also,
networking more and advertising less can help to reduce marketing costs.