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    I have no idea how to start, or even what the question means.

    The price strategy of demand for amonopolist's product is -0.7. Advice the firm on its pricing strategy

    Thanks!
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    Firstly the elasticity is less than 1, this means it's relatively inelastic. So if the firm were too increase prices, demand wouldn't be affected as much, etc etc.
    So strictly speaking it would be better to put prices higher than competition?
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    (Original post by Ryarn)
    Firstly the elasticity is less than 1, this means it's relatively inelastic. So if the firm were too increase prices, demand wouldn't be affected as much, etc etc.
    So strictly speaking it would be better to put prices higher than competition?
    Yeh I'd agree with this. As the absolute value of the ped (price elasticity of demand) is under 1, the product is inelastic (although not hugely). This means that a change in price will not have a big impact on the quantity demanded. The company could increase prices slightly, whilst still maintaining the same level demanded.
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    As you will now understand from the past 2 posts, the demand for a price inelastic product is less likely to go down when the price is increased.

    Try to think of the price of fuel (petrol/diesel). Fuel is something the majority of people need, to get to university, work, visit family, etc... When price for petrol is increased (even by a lot), the demand for it will stay relatively the same because the majority of people aren't going to go riding their bike 20miles every morning.

    A pricing strategy is establishing the optimum price for a product that will result in the highest profit, so if it's a low mark question you will merely have to comment on the idea that a price inelastic product will mean that, generally, the optimum price on their product is more flexible (meaning they can set a higher price than usual), due to the nature of price inelastic products (mentioned above).

    You need to be careful that you don't just take price inelastic products at face value. In theory the company can put prices high, but you need to remember about other factors, such as competition. If your competitor has the same type of product as you, you need to remember to price competitively rather than just thinking "Oh our product is price inelastic, if we put our price 200% higher than the competitor down the road our demand wont change", because it's wrong. Of course, if BP priced petrol at 94p per litre, and Total priced petrol at £2.70 per litre, yes they both have the same inelastic product, but who do you think will get the highest demand?
 
 
 
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