Running head: PRICE ELASTICITY OF DEMAND
Price Elasticity of Demand
University of Phoenix
Price elasticity of Demand
With the objective of increasing the company's revenue, we have been tasked by Hyundai Motors to determine if the company should increase or decrease the price of its Sport Utility Vehicle (SUV), Santa Fe. We will use the price elasticity of demand concept to determine what actions should be taken. Additionally, we will determine the impact on demand for the Santa Fe if the incomes of Hyundai customers increase by 10 percent. We will use the income elasticity of demand concept to help us determine that impact. Our goal is to help the company determine the best unit price to maximize revenue. We will begin with some background information on the vehicle. Here is some background information on the vehicle. The Hyundai Santa Fe's first year of production was 2001. Not only was it their first Suburban Utility Vehicle (SUV), it was also Hyundai's first vehicle designed with American consumers in mind, "We saw that this SUV market was defined by chunky, truck-platformed models such as the Cherokee, Xterra, Wrangler, Explorer, 4Runner and the Blazer," said Hyundai's U.S. president Finnbar O'Neil, "and even though these vehicles sell well, we found they have a high level of dissatisfaction with certain characteristics that relate to their frame design." (The Car Connection, n.d) Overall, we have several years of data to help us determine the best course of action. Price elasticity of demand for the Santa Fe is determined by comparing the change in quantity demanded to the change in price. Economists measure the degree of price elasticity or inelasticity of demand with the coefficient Ed, defined as:
percentage change in quantity
demanded of product X
Ed = -----------------------------------------
percentage change in price
of product X
The percentage changes in the equation are...
References: Aizcorbe, A. Starr, M. & Hickman, J. T. (2004). Vehicle Purchases, Leasing, and Replacement Demand. Business Economics, (April 2004), 7-17.
McConnell, C. R., & Brue, S. L. (2004). Economics: Principles, Problems and Policies. : The McGraw-Hill Companies.
The Car Connection, (n.d.). 2001 Hyundai Santa Fe review. Retrieved 27 July, 2007, from http://www.thecarconnection.com/Vehicle_Reviews/SUVs_Wagons/2001_Hyundai_Santa_Fe.S181.A609.html
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