Assignment Activity Unit 3

University of the People

Microeconomics

Bus 1103-01

Instructor: Samineni Sridevi

 Introduction

A fashion retailer by the name Emma’s Boutique, recently faced an evident decline in sales.

Considering the current scenario, the company decided to conduct a survey to analyze the impact

of price change, income change and a change in price of their competitor on the overall demand

on their clothing items (Investopedia Team, 2024). As per the information provided, the survey

results provided the following data:

Initial Final Initial Quantity Final Quantity Initial Final

Elasticity Type
Price Price Demanded Demanded Income Income
Price Elasticity 150 units per 100 units per
$50 $60 - -
(PED) month month
Income Elasticity 150 units per 180 units per
- - $3,000 $3,500
(YED) month month
Cross-Price 150 units per 130 units per
$55 $50 - -
Elasticity (XED) month month

The following information provides a detailed case analysis report to delve into the possible

cause of change, subsequently the measures that can be taken by the retailer.

1. Price Elasticity of demand:

Price elasticity of demand is defined as the change in demand for a product in relation to

a change in price. Demand can be elastic or inelastic. Elastic demand is when the change

in demand is high due to a change in price. While inelastic demand is the opposite where

the change in demand is small due to a change in price. The price elasticity of demand is

calculated by the following formula:

PED = % change in quantity ÷ % change in price

Calculation:

In order to find the Price elasticity of demand we will need to first calculate both the

values stated above.

% change in quantity = (Q2 – Q1) x 100

Q1

= (100 – 150) x 100

150

= - 0.33 x 100

= - 33.33 %

% change in price = (P2 – P1) x 100

P1

= (60 – 50) x 100

50

= 0.2 x 100

= 20 %

PED = - 33.33%

20%

= - 1.67
 a. As per the calculation the Price elasticity of demand is greater than 1. Therefore, the

demand for this clothing item is elastic.

b. Implications: Considering that the price elasticity of demand is elastic, this means

that an increase in price will lead to a significant decrease in demand affecting the

overall revenue of the company. Therefore, Emma’s clothing should consider

lowering the price to boost back revenue. Moreover, Emma’s boutique should also

look into improving their brand image. If the cost of production is high and there is a

dire need to increase the prices, having a strong brand image will encourage

customers to be willing to may more and the demand will subsequently increase.

2. Income elasticity of demand:

Income elasticity of demand is an economic measure the responsiveness of the quantity

demanded for a product to a change in income. Income elasticity of demand can either be

elastic or inelastic (Hayes, 2024). The formula to calculate Income elasticity of demand

is:

YED = % change in quantity ÷ % change in income

Calculation:

% change in quantity = (Q2– Q1) x 100

Q1

= (180 – 150) x 100

150

= 20 %
 % change in income = (I2 – I1) x 100

I1

= (3500 – 3000) x 100

3000

= 16.67 %

YED = 20%

16.67%

= 1.2

a. As per the calculation the income elasticity of demand is income elastic as it is

greater than 1. This signifies that the demand increases to a certain level as the

income increases.

b. Considering that there can be an affect on the demand as the income rises, Emma can

focus on customers who can afford their clothing by increasing their quality and use

better marketing tactics to increase their brand image.

3. Cross price elasticity of demand:

Cross price elasticity of demand is an economic concept that determines the

responsiveness of quantity demanded of one good when the price of another good

changes (Hayes, 2024). It is calculated using the following formula:

XED = % change in quantity demanded of product A ÷ % change in price of product B

Calculation:

As per Emma’s clothing data the Cross price elasticity of demand will be calculated in

the following manner:

% change in quantity= (130– 150) x 100

150

= -13.33 %

% change in price for competitor’s product:

% change in price = (50 – 55) x 100

55

= -9.09 %

XED = -13.33% ÷ -9.09%

= 1.47

a. Although the calculation include negative values, the cross price elasticity of demand

is positive. Therefore, both Emma’s clothing and competitor’s clothing item are

substitutes.

b. Since the competitor’s item and Emma’s clothing are substitutes, they need to be

careful with their pricing strategy. An increase in the price can lead to the customers

being pushed away and wanting to prefer buying the competitors items. In order to

retain their customers, Emma’s clothing should consider increasing their quality and

better their brand image. `simultaneously, providing discounts and promotional offers

can prove beneficial.

Conclusion

The above calculations and implications for all three can help the company make more informed

decisions. They would need to focus more on the quality of their clothes, promote their brand in

a better way, improve the quality and find strategies that work in favour in order to not drive

their customers away.

Reference

Hayes, A. (2024). Cross price elasticity: definition, formula for calculation and example.

https://www.investopedia.com/terms/c/cross-elasticity-demand.asp

Hayes, A. (2024). Income elasticity of demand: definition, formula and types.

https://www.investopedia.com/terms/i/incomeelasticityofdemand.asp

Shapiro, D., MacDonald, D., Greenlaw, S. A., Dodge, E., Gamez, C., Jauregui, Andres.,

Keenan, D., Moledina, A., Richardson, C., & Sonenshine, R. (2023). Principles of

microeconomics (3rd ed.). OpenStax. Licensed under CC 2.0.

The Investopedia Team. (2024). Price elasticity of demand: meaning, types and factors that

impact it. https://www.investopedia.com/terms/p/priceelasticity.asp