It will be recommendable for Kitty Sweaters to use point price elasticity to make the right decision on whether to raise the price for sweaters or not. According to Smith (2006), price elasticity of demand refers to the measure of responsiveness of the quantity of product demanded with respect to change in its price. It can be determined using two methods namely; point price elasticity or Arc price elasticity. This paper will focus on the use of point price elasticity to make a decision on whether to raise the price of sweaters or not. Point price elasticity applies differential calculus to calculate the elasticity small change in price and quantity demand at any given point in the demand curve. This is done through the formula;
Point price elasticity formula takes account of infinite small changes that may not be catered for by the general price elasticity of demand formula. Kitty sweaters business will need to focus on the value of elasticity demand determined using the formula above. Through these results yield using this method, I will group the demand for the product in three categories. These will include perfect inelastic, inelastic, perfect elastic, elastic and unit elastic.
The demand will be termed as elastic if the point price elasticity value is greater than one. This implies that a slight change in price of sweaters will have a large effect on the quantity demanded by consumers (Smith, 2006). The best decision for this type of demand will be not to raise the price of sweaters. This is because raising their costs may lead to loss of customers.
On the other hand, if the point price elasticity of the good will be found to be less than one, then this will be termed as an inelastic demand. This implies that changes in the price of the product will have small effect on the quantity of sweaters demanded. The decision underlying this type of demand will be to raise the price of sweaters since it will have a small effect on the demand for the product. This is to mean that raising the price of sweaters will not force consumers to look for substitute goods (Smith, 2006).
Finally, when the point price elasticity is found to be equal to one this will be referred to as unit elastic demand. This is to mean that a change in price will have an equal effect to the quantity of sweaters. The decision for this demand will be to raise the price of the sweaters by a very small value (Smith, 2006).
Generally, it will be good to raise the price of sweaters in a circumstance that will not lead to a large effect on the quantity of sweaters demanded. This is because loss of consumers leads to reduced profits for the business. Therefore it will be a wise decision to raise the price of sweaters when the point price elasticity value is less than one where the change in price will have a small effect on the quantity demanded. In addition, it will be also good to raise the price in case of unit elastic demand where a small increase in price will lead to a small effect on the quantity demanded. However, it will be good not to raise the price of sweaters in the case of elastic demand where a small change in price will lead to a large effect (Smith, 2006).
Smith, P. (2006). Advanced economics. Deddington: Philip Allan Updates.