The impact of the decision by AutoEdge

The impact of the decision by AutoEdge to increase prices will be defined by the price
elasticity of demand. Price elasticity of demand is the change in quantity demanded occasioned
by changes in price (Tellis, 1988). Price elasticity of demand is very useful in economics to
determine whether increasing prices could be profitable or not. There are five types of price
elasticity of demand. These are perfectly elastic demand, perfectly inelastic demand, relatively
inelastic demand, relatively elastic demand, and unitary elastic demand.
In perfectly elastic demand, a small change in the price of a good results in a huge
change in the demand of the good. In such a case, it is unwise to increase the price. In perfectly
inelastic demand, there is no change in the demand after the increase in prices (Tellis, 1988).
Companies can thus increase prices, and this would result in increased profitability. In a
relatively elastic demand, the proportionate change in demand is larger than the proportionate
change in prices. A relatively inelastic demand is one where the percentage change in demand is
lesser than the percentage change in the price (Tellis, 1988). Unitary elastic demand is where a
change in price produces an equal change in the quantity demanded.
The law of demand states that the demand curve is downward sloping. The implication is
that when prices rise, consumers consume less and less of the product. To this end, the decision
to increase prices will result the demand for AutoEdge’s products to go low. The auto parts
industry is highly competitive. This means that AutoEdge does not operate as a monopoly. The
decision to increase the prices will thus likely result in consumers shifting to the company’s
competitors. The problem is compounded by the fact that the company has faced bad publicity in
the past. The bad publicity has challenged its brand name. Even the most loyal customers have

been forced to doubt the company’s dependability. The decision to increase prices may thus
compound the situation and result in the company losing more of its loyal customers.
The demand curve of auto parts appears to be relatively elastic in the short run and in the
long run. In the short run, an increase in the prices will result in a greater change in the quantity
demanded. This is because there are many companies that are competing in the market. The
competition will mean that consumers will seek cheaper alternatives. AutoEdge will thus lose
many consumers in the short run. In the long run, the company will also suffer a decline in sales
as a result of hike prices. Even though there are loyal customers, the customers may eventually
switch to alternative brands owing to the negative publicity that the company has witnessed in
the past. The vigorous competition in the auto parts market means that increasing the prices at
this point in time may not be a good idea and could mean that the profitability declines.

References

Tellis, G. J. (1988). The price elasticity of selective demand: A meta-analysis of econometric
models of sales. Journal of marketing research, 25(4), 331-341.