In order to increase revenue, should baby shoe sellers increase or decrease the price, when the price is $15? Explain.
The correct answer and explanation is:
To determine whether baby shoe sellers should increase or decrease the price when it is set at $15, it is important to understand the concepts of price elasticity of demand and market conditions.
Price Elasticity of Demand (PED) measures how sensitive the quantity demanded is to a change in price. If the demand for baby shoes is elastic, meaning that consumers are highly responsive to price changes, increasing the price could lead to a decrease in the quantity sold, which could hurt revenue. In contrast, if the demand is inelastic, meaning that price changes have little effect on the quantity demanded, increasing the price could lead to higher revenue.
For most everyday products, like baby shoes, demand tends to be inelastic because consumers may not drastically change their purchasing habits even if the price increases. Parents may still need to buy shoes for their babies regardless of a small price hike. If the baby shoes are positioned as a necessity or there are fewer substitute options available, the demand may be more inelastic.
Market Conditions also play a crucial role. If competitors are offering baby shoes at a lower price, increasing the price could make the shoes less attractive to price-sensitive customers, which would decrease demand. However, if the quality of the shoes is perceived as superior or if the brand has strong loyalty, then a price increase may be absorbed by consumers without significantly reducing sales.
Given the general nature of baby products being somewhat inelastic, baby shoe sellers might consider increasing the price if they believe the demand is not significantly affected by small price hikes, and they have a competitive edge in quality or brand loyalty. However, careful market research should be done to determine the exact price elasticity of the product in their specific market.