Introduction

The aim of this assignment is to collect data about the prices as well as quantity demanded of three products and evaluate it based on consumer’s perception. The study also highlights on the market demand curve from the demand schedule of these three products. Market demand refers to the series of different quantities of goods or service that the consumers in the particular market are willing to buy collectively for series of prices per unit of good or service, provided that other things remain constant (Hall and Lieberman 2012). This assignment also focuses on the evaluation of both the price elasticity and the cross -price elasticity for all these three products by using midpoint formula management. The demand elasticity refers to sensitivity of demand for product with respect to change in other variables that includes prices and income. 

The questionnaire has been prepared based on the information collected about the price and quantity demanded of these three products by ten consumers. This questionnaire is given as under:

• What is the price of the three products you bought?
• Will you purchase the same quantity of product if the price decreased by 10%?
• Will you switch to other products if the price increases by 10%?
• Will you purchase more quantity of product if its price decreases?
• Will you purchase less quantity of products if its price increases?

Analysis of the data collected from the market about three products

The three products that these consumers select for purchasing it are tea, coffee and health drinks. The prices at which ten consumers bought these three commodities are given in the appendix. The data collected reflects that there is less variation in price of each product bought by the ten consumers. In addition, the response collected from the consumers highlights that if the price decreases by 10%, then some of the consumers will consume same quantity of health drinks as it is a luxury product. However, most of the consumers will choose to buy more tea and coffee if its price declines (Rader 2014). Some of the consumers also prefers to switch over to other products if price of the good increases by 10%. Therefore, if the price of tea increases by 10%, then the consumer might switch over to purchase coffee and vice-versa. The main reason behind this is that tea and coffee are considered as substitute products. Nevertheless, in case of health drinks, the consumers might prefer to buy less health drinks if its price increases as it not a necessity good. In addition, most of the consumers will tend to buy more quantities of preferred products if its price falls (Nicholson and Snyder 2014). This means that consumers will prefer to buy more quantity of tea and coffee rather than buying health drinks. Health drinks being luxury good will not influence the decision of the consumers in buying more of it if its price declines. Furthermore, the data collected from the respondents also reflects that the customers might purchase less quantity of luxury goods such as health drinks if its price increases. Nevertheless, the preference for purchase of tea and coffee might not change even though its price rises. However, it can be expected that other consumers will increase the quantity by 20%, if the price declines by 10%.

The market demand curve is drawn from the horizontal summation of individual demand curve or demand schedules of the consumers in a particular market (Baumol and Blinder 2015). The market demand curve for tea is drawn from the horizontal summation of individual consumers demand schedule , which is shown below:

Price elasticity and cross-price elasticity of three products

Price elasticity of demand is defined as the responsiveness of quantity demanded with respect to change in price for the specific good (Rios, McConnell and Brue 2013). If the price elasticity of demand becomes less than one, the demand is said to be perfectly elastic. When the value becomes equals to one, the demand is unitary elastic. Finally, if the price elasticity of demand becomes greater than one, the demand becomes perfectly elastic. Cross price elasticity of demand signifies the responsiveness of quantity demanded of a specific product with respect to change in price of another product (Bauer 2014). In case of substitute good, the value becomes positive as increase in price of one product leads to increase in demand for other product. On the other hand, the value becomes negative in case of complementary product. In this case, the price elasticity of demand and cross price elasticity of demand for these three products are estimated by using mid-point formula. The midpoint formula for change in price is given as- Price _new– Price _old/Price _average  and for the quantity demanded is given as – Qd_new– Qd_old/ Quantity _average.

The price elasticity of demand and cross price elasticity of demand calculated for tea, coffee and health drink are less than one, which indicates that the demand is inelastic for these three goods (Mankiw 2014). This means that change in the product price leads to smaller change in its quantity demanded. However, in this situation, the producers will try to increase the price of these products for maximizing revenue.

Conclusion

The above assignment provides a view that several factors can cause change in price and quantity demanded for a particular product. The market demand curve for a specific good also depends on the change in its demand schedule. Elasticity of demand also has huge significance to the producer as they sets the product price based on it. Therefore, if the demand for the product management is elastic, they strategize to reduce price for increasing sale. In case of inelastic demand, they try to charge high price for the commodity for attaining larger revenue from sales.

Price elasticity of demand and cross price elasticity of demand for tea, coffee and health drinks

References

Bauer, M.J.R., 2014. Principles of microeconomics.

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage Learning.

Mankiw, N.G., 2014. Essentials of economics. Cengage learning.

Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application. Cengage Learning.

Rader, T., 2014. Theory of microeconomics. Academic Press.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.