Price Elasticity

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Many companies in today’s business world face tremendous pressure from its shareholders to maximize profits. Those companies are forced to find ways to maximize revenues from sales and minimize the costs of doing business. One way to determine the correct pricing for a product would be to use the concept of elasticity of demand. This paper will look at elasticity and the factors that go into calculating it, and describe how using elasticity could help Apple Inc. (Apple) maximize its revenue from the iPod. Finally, this paper will describe how a change in consumer income will affect the overall demand for iPods. Price elasticity is a tool designed to identify the overall change in demand or supply of a product compared to the overall movement of price. For the sake of this paper, we will focus on the overall change in demand from consumers. Elasticity is calculated by creating a ratio of the percentage change in demand of a good compared to the percentage change in price. If the percentage change in demand is greater than the percentage change in price, the product would have a ratio of more than 1, and would therefore be considered elastic. If the ratio were greater than 1, that product would then be considered inelastic, as the percentage change in demand was less than that of the percentage change in price. For example, if a product were to increase in price by 10%, and the overall demand fell by only 5%, then the good would be considered inelastic. If a 10% rise in price caused a 20% fall in demand that same good is elastic (McConnell & Brue, 2004). Since Apple released the first iPod in 2001, the product has served as one of its iconic products (Hormby & Knight, 2005). Facing the ultimate objective of increasing revenue, Apple continually addresses option of changing the price of the current generation iPod. Elasticity of demand helps Apple evaluate whether or not the iPod would increase or decrease revenue if Apple were to change its price. If the iPod was...
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