Assignment

Why Is Elasticity Important?

You have just overheard the following statement:

"I don't understand why economists make all this fuss about elasticities. For a start, I have no way of telling what the price elasticity of my shoes is except through calculation and I don't have enough price data to calculate the price elasticity coefficient of the shoes I sell? The ones I sell are all exclusive, imported fashion items. I don't need to know their price elasticity. If the imported price goes up, I simply pass the increased cost on to my customers."

Discuss this statement fully and explain why knowledge of elasticities may be helpful to managers when making pricing decisions.

Discussion: Elasticity and revenue

You are offering advice to an owner of a restaurant and she shares the following information:

"The restaurant often runs a special on bacon and eggs. Normally, it sells about 250 serves at a price of $7, but this rises to about 300 serves at the special price of $5. The chef argues that even 250 serves pushes the kitchen beyond its production capacity. She argues that a price rise above $7 would ease the pressure on the kitchen and would leave the restaurant better off."

Would you advise the owner to follow the chef's advice? Explain your reasons.