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Price Elasticity Demand of IT Services

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Estimating and analyzing the elasticity of demand for IT services

2007 prices
Server Performance Monitoring Price per server per month
Windows $ 18
UNIX $ 20
SAP $ 22
Database $ 22

2008 prices
Server Performance Monitoring Price per server per month
Windows $ 10
UNIX $ 12
SAP $ 14
Database $ 14

The server rate was officially defined for 2008 and represents a reduction of 43% below
the 2007 rate. The rate reduction is the result of Productivity Savings, Automation Projects,
Install Base Growth, and Reduced Infrastructure Costs. The number of servers that is being monitored
is 70,000 which is a growth of 10,000 servers from the previous year. What is the price
elasticity of demand? From the price elasticity what should the new rates be for 2009 if
the demand increases at the same rate?

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Solution Summary

The expert examines price elasticity demand of /it services.

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Price Elasticity of demand = % change in quantity demanded / % change in price

% change is given by = new value / old value - 1

so, we have % change in quantity = 70,000 / 60,000 - 1 (since the number of ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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