Discussion of a Change in Demand Through the Product’s Elasticity
Very Big US Auto Company is a large manufacture of autos in the US. However, because of the shortages in components supply and measures taken to improve the safety of workers, the cost of production of goods increases by 10%. Based on that elasticity of demand, it is possible to calculate the effect of the increase on the quantity demand, based on that elasticity of demand is 1.2. According to the formula for price elasticity of demand, E = Q / P (James, 2021). Therefore, for this case, this equation is: 1.2 = Q / 10; Q = 1.2 * 10; Q = 12 %. It implies that 10% increase in cost will result in 12 % reduction in demand. The demand curve for the product of the company (cars) is relatively elastic, as the change in cost results in even greater changes in demand.
A Statement to the Board
Very Big US Auto company experiences a set of factors, such as shortage of components supply and additional expenses for the safety of employees, which affects the cost of goods produce, increasing it by 10%. With respect to the potential financial impact the proposed increase in cost will have on profits and the industry supply/competitive environment, it is possible to draw further conclusions. The estimation regarding the reduction of demand for cars, after the increase of the cost by 10%, is expected to be 12%. However, despite the fact that a smaller number of cars sold results in lower profit, it is known that pandemic has made some transportation substitutes less acceptable, which has increased demand for vehicles. Therefore, it is possible to forecast that customers will pay a larger share of the cost increases, and the profit of the company will not be lowered.
Reference
James, M. (2021). Price Elasticity of Demand. Investopedia.