Auto Parts Demand Elasticity

The board at AutoEdge is considering changing its market from the United States and reducing the price. The result would be an increase in demand. However, the board would like to know whether auto parts elasticity is inelastic, inelastic, unitary elastic, relatively inelastic, or relatively elastic. This paper, therefore, evaluates the different types of demand elasticity and gives recommendations on which type of elasticity auto parts fall under

Perfect Elasticity

Perfect elasticity is the elasticity under which there is one price at which an infinite quantity can be sold. This type of demand is also called infinite elasticity. The equation for perfect elasticity is E_p = ∞.

Perfectly Inelastic

Perfectly inelasticity refers to a scenario where there is no change in demand regardless of the price. This can be demonstrated as E_p= 0. For example, if AutoEdge were to increase its prices by 10 %, there would be no change in the quantity demanded under perfectly inelastic conditions.

Unitary Elasticity

Unitary elasticity refers to a scenario where the change in quantity demanded is equal and unitary to the change in price. This means that under this type of elasticity, a 1% change in price would lead to a 1% change in quantity demanded.

Relatively Elastic

Relatively elastic demand refers to a scenario where demand changes by a bigger margin than the change in price (Keat et al., 2013). For example, if AutoEdge were to increase its prices by 20% and the demand reduced by 30%, it could mean that auto parts demand is relatively elastic.

Relatively Inelastic Demand

Relatively inelastic demand refers to the scenario where the quantity demanded changes by a smaller margin than the change in price (Keat et al., 2013). For example, if the price of the spare parts changed by 30% and the change in demand was 10%, this could signify relatively inelastic demand.

Considering the above definitions, there is a need to also evaluate determinants of elasticity and the unique product characteristics before deciding the type of elasticity that auto parts fall under. The demand for auto parts is directly connected to the need for car service and automotive repairs. The automotive industry also has high competition compared to other industries, and as such, a price increase could make customers look for other options. This leads to evaluating the ease with which customers could find substitutes. Considering the availability of other auto parts brands in the American market, an increase in prices by Auto Edge would cause its customers to find alternative sources. The proportion of total expenditures is another key determinant of elasticity (Keat et al., 2013). Some auto parts can be quite pricey. However, the changes in prices may not have a significant impact on the purchase decision because parts need to be replaced for vehicles to operate, and in many cases, the decision cannot be postponed. Besides prices, auto parts customers are also interested in the quality of auto parts, durability, and guarantee of performance for some auto parts. For instance, shocks are one category of the most purchased parts where customers require some performance guarantees in terms of years of performance. Considering the above factors, the elasticity for auto parts is relatively inelastic. This means that a change in prices causes a less than proportionate change in quantity demanded.

References

Keat, P., Young, P., & Erfle, S. (2013). Managerial Economics (7th ed.). Pearson. Retrieved from https://coloradotech.vitalsource.com/reader/books/9780133560329/epubcfi/6/26[%3Bvnd.vst.idref%3DP7000481636000000000000000003E2E]!/4