CARLOS CRUZ PRICE ELASTICITY SCENARIO
Carlos Cruz is an inventor and he is also an enterprising individual. He concluded that the future generation will soon be engaging in a full digital reliance which is happening right now knowing that movies, audio, cell phone including games are all digitally accepted. He planned on concentrating the development of Audio Book which will become his business he have already master doing the conversion of written letter into audio cd’s using a text to speech program but he still believe that it doesn’t sound much like human so he decided to create new one by recording the books by himself or hire a personnel to do the recording. He also realized that there are available audio books in the libraries but that was not in a digital format, there are also supplier who can sell audio book that he can distribute as an inclusion for his business.
He has done so much research just to master his business and so Carlos decided to determine how much he is going to earn if he distribute an audio book online using his website and selling old books translated into an audio cd’s for US dollar and new books audio cd’s for dollar taken from the supplier and his designs combined. But during his first few months of operation he later found out that the new books sold 2000 pieces while the old book only gather 1000 pieces of sales. Moreover, he was confused why the more expensive audio books gather more sales. During his visit to her friend Elsa Rivera he found out that she was also selling her artwork online and she already experienced the same thing he does, Elsa advice Carlo to raise his price in order to gain more customers since she does the same and gather more sales.
In another relevant situation and pricing strategy of his research seems to suggest that he should lower his price, when movies in videotapes was released and sold dollar per piece the sale is doing quite well but when they lower the price to per piece the volume sales increases up to 600% during those times. But up till now videotapes no longer exist because of the revolution of digital CD’s and DVD’s. Carlo is now left with two options if he is going to increase or decrease his price in old audio books he is selling. Price elasticity has something to do with his decision in order to calculate a projected estimate in his business. Price Elasticity of demand can measure the change in price and quantity in order to create good prediction of demand.
Old audio books have a price of dollars and a demand of 1000 while the new audio books have a price of dollars and a demand of 2000. If we are going to use the Price Elasticity theory we can compute the same increase or decrease in price. In this case we are going to use a simple formula to get the elasticity of demand suppose we decide to increase the price of the old audio book up to dollars this will be its projected computation and let us also presume that there is an increase in demand of 100%; Let, Po = Initial Price is while P1 = New Price is this means that there are already a 33% increase in price. In another argument let’s say that Let Qo = Initial Quantity is 1000 Q1 = New Quantity is 2000 this means that we are going to presume an increase in sales of old audio books. To simplify let us consider the following in a clearer path formula; Qi = 2000 Qo = 1000 Pi = 15 Po = 10
Qi- Qo 2000 – 1000 1000 1000 1500
Qi+Qo 2000 + 1000 3000 1500 1000 1.5 X 2.5 = 3.75 Price Elasticity
2 2 2 is positive. Price
Pi –Po 15 – 10 5 _5_ 12.5 change is highly
Pi +Po 15 +10 25 12 5 5 recommended.
2 2 2
When the price of the Arc Elasticity shown is more than 1 the elasticity is positive and therefore recommended to increase the price of such product in order to gain more sales however this is just a presumption because the quantity of demand still needs more market testing in order to understand its price in the market. On the other hand if the Arc Elasticity shows less than 1 price increase in not recommended. Let us take for example that the price increases but the demand shows the same sales quantity;
Qo = 1000 Q1= 1000 Po = Pi =
Qi- Qo 1000 – 1000 0 0 1000
Qi+Qo 1000 + 1000 2000 1000 0 0 X 2.5 = 0 Price Elasticity
2 2 2 is zero. Price change
Pi –Po 15 –10 5 _5_ 12.5 is not recommended.
Pi +Po 15 +10 25 12 5 5
2 2 2
Business people can experiment in various determinants in order to formulate pricing strategy of a product. Upon studying the Price Arc Elasticity above the price change of a product still shows that sales or demand of the market will only be the one to determine if it is possible to change in price. Generally if the demand is high changes or increase in price is recommended just like the oil and petroleum products in the Middle East. But if the demand is low the price of the product should be maintain or probably even be decrease to penetrate or create an increase in demand just like the “buy one take one” in a department store and this has been the basic secret in pricing strategy of most business. Carlos can test both price increase and decrease and whatever gain more demand will be his pricing strategy in establishing his business.
Credit:ivythesis.typepad.com
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