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Implied Arc Income Elasticity of Demand

Organic Gardens is a leading distributor of potted plants and their maintenance for business environment. Demand for organic services is tied to overall pace of business activity and therefore is sensitive to changes in national income.The greenery service sector is highly competitive, so organics demand is also very price-sensitive.
During the past year, Organics sold 10,500 potted plants at an average wholesale price of $25 per plant. This year per capita income is expected to fall from $34,200 to $30,600 as the nation enters a steep recession. Without any price change, Organics expects current-year sales to fall to 7,500 potted plants.
D.- What economic factors do you think management should begin to include in their analysis that would improve their ability better predict overall sales?. How might they better manage their marketing strategy to improve sales?.

Solution Preview

We find the arc income elasticity by dividing the ratios of the changes in income and quantity demanded to the averages of income and quantity demanded. Thus we have:
[[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2 / [[Income(NEW) - income(OLD)] / [Income(OLD) +Income)]]*2
Inserting the values we're given:
[[7,500- 10,500 ] / ...

Solution Summary

Implied Arc Income Elasticity of Demand is used to determine a marketing strategy.

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