Compare WTP with elasticity

Topics: Supply and demand, Investment, Price elasticity of demand Pages: 1 (268 words) Published: September 26, 2013
We can calculate WTP by comparing saving cost by the product. If we change, we can save human resource fee, raw materials fee, and electric cost. But we have to invest fix cost. So we need to think whether this investment is worth investing or not. With this value for WTP, one can estimate elasticity of demand. If there is no switching cost between lens and medicine, under any price above WTP, farmers will choose only medicine. On the other hand,, farmers will chose only lens at any price below WTP. Therefore, demand curve is perfectly horizontal. If we assume there is some switching cost, and the cost is different from farmers, demand increase when price goes down. If we assume liner demand curve, we can say slope of demand curve is negative. Still, at the price of WTP, elasticity is infinite, because no one choose lens above WTP. Elasticity decreases as price goes down. At price of WTP/2, elasticity is 1. If price is nearly zero, elasticity is also nearly zero. In case demand curve is not liner, we have same topics. We are not sure where elasticity is zero, but the more farmers face low switching cost, the higher price we can set. With this in mind, an effective pricing strategy would price the lens at least below the willingness to pay. Therefore, Tommy:s suggestion is too low. It is likely that at the price elastic is above 1, if demand curve is liner. It seems ridiculous to assume liner curve, but if we suppose the distribution is symmetry, we can assume liner curve is best guess.
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