Marketing has submitted evidence that the co-efficient of the product offered is 2.5 and recommends lowering prices by 10%. However marketing bonuses are based on sales revenues and the General Manager's (GM) profit targets must be met. This e-portfolio assignment analyzes the price reduction from both perspectives, that of the Marketing department and the GM to make a recommendation as to strategy.
Importance of Determining Price Elasticity.
"Price elasticity is important in business to determine in a given market whether an increase (or decrease) in prices will generate an increase (or decrease) in revenues" (Elasticity coefficients, n.d.). "Elasticity of demand calculations reflect "the percentage change in quantity demanded per 1percent increase in price" (Hall, 2001, p.92). It should be noted that when the elasticity co-efficient is greater than 1.0 an increase in price will result in a decrease in demand and thus a decrease in revenues. When the elasticity co-efficient is less than 1.0 an increase in price will result in an increase in demand and a resulting increase in revenues. Therefore, :.
When E > 1 .
Price and revenues move in opposite directions.
An increase in prices generates an opposite change in quantity demanded that more than offsets the change in price.
Therefore, revenues decrease.
When E = 1 .
Small changes in price do not modify revenues.
When E < 1 .
Price and revenues move in the same direction .
An increase (decrease) in prices generates an opposite smaller change in quantity demanded (in percentage terms).
Therefore, revenues increase (decrease) (Elasticity coefficients, n.d.).
Calculating the Elasticity coefficient (E).
The formula for calculating the elasticity co-efficient is as follows:.
( %change in y ) ( %change in x ). "If y is quantity demanded and x is price, then the ratio represents the price-elasticity coefficient, which indicates the percentage change in quantity as price changes 1%.