Products, Services, and Prices in the Free Market Economy

Profit is the main motive of any business organization in world business environment. Business firms try to achieve this by exploiting ways of increasing their rate of turnover. They could achieve this by manipulating the prices and quantities of their goods and services sold. This issue relates to this write up. Using the concept of price elasticity in determining whether a company should increase or decrease the price of goods and services it sells in other to pursue revenue depends on many factors.

Here, we have to understanding the concept of price elasticity, which refers to the degree of responsive to a change in quantity demanded to changes in price. There are different forms of price elasticity that include elastic, perfectly inelastic, perfectly, unitary and inelastic demand that should concern the company. In economics, increase in the price of good leads to decrease in its quantity demanded. Therefore, if the company wants to increase the price of their product, they should only increase the price of goods that their demand is perfectly inelastic.

Since, perfectly inelastic demand refers to goods that their quantity demanded remain constant no matter their price changes. In contrast, if the company is considering reducing the price of the goods, they should only reduce the price of goods that their demand is perfectly elastic, since perfectly elastic demand refers to the goods that consumer could buy completely from the market if their prices reduce in a small proportion. Under the concept of income elasticity of demand, we have two types of goods: normal and inferior.

Demand for normal good increase as income increases, while the demand for inferior good decrease as income increases. Therefore, if the income of the customers increase by 10% we cannot conclude whether the demand for the commodity will increase by more than, less than or about 10%. We can only confirm these on the type of goods that the customer demands. If the company sells normal goods, then the demand of the customer will increase, but not more than or about 10%.

Since, in economics the marginal propensity to consume (mpc) is not equal to one. It means that the consumer will save part of his increased income. In contrast, if the customer demands for inferior goods, then the demand will be less than 10%. Reference: Moffatt M. , (2002). Income Elasticity of Demand: A primer on the income elasticity of Demand. Economics, About. com. http://economics. about. com/cs/micfrohelp/a/income-elast. htm

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