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Inelastic, Elastic and Unitary Price Elasticity Differences Explained

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The marketing department has discovered that the price elasticity for your company's products in Brazil is expected to be much greater than in current markets served. Separately, your CFO sent you an e-mail earlier in the week stating that depending on how much business your company does abroad, the firm would expose 5 to 20 percent of revenue to currency fluctuations (the Real and Euro are the currencies for Brazil and Germany respectively).

Both of these issues are of concern to you, so you decide to have a meeting with the VP of Marketing and the CFO.

- Explain the differences among inelastic, elastic, and unitary price elasticity to the VP and CFO. Then, what questions would you ask? What recommendations would you have for the CFO?

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Solution Summary

This solution describes inelastic, elastic, and unitary price elasticity in layman's terms and also suggests questions that should be investigated y the company and more general next steps for them to take to advance. 433 words.

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Price elasticity is simply the proportionate change in sales of a product that will be bought as a result of a unit change in price. We can explain this concept with a simple formula MR = P * (1+E)/E. MR represents marginal revenue, P represents the price and E is the price elasticity of demand for our product. When our price elasticity is negative,
it is considered elastic and the quantity demanded is sensitive to the price changes. Any increase in price will decrease the demand and the total revenue. When our price elasticity is small and between 0 and 1 in absolute value, it is considered inelastic and ...

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Umut Oltulu, MBA
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  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
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