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Demand Effects On Product Categories

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1.As a producer, why is it important to consider the price elasticity of demand of your product when setting the price you are going to charge?
2.Explain the difference between comparative advantage an absolute advantage.



Price elasticity of demand can be specified a measure applied to present the responsiveness or elasticity of the quantity demanded to change in its price. Present report revolves around the analysis relating to impact on the price elasticity of demand for the product while setting the price.


Impact of price elasticity of demand for product while setting its price

Price Elasticity of Demand is referred as a measure of change in quantity demanded corresponding to change in the price of the product after considering other factors of demand like income, customer choice, etc. constant. It can be said as an essential aspect for analysing the responsiveness of consumers regarding fluctuation of pricing (Gelp, Wilms & Croux, 2016).  The product is deemed to have elastic demand in case the change in price is significant to change in demand. It can also be said as that a small change in price leads to a greater change in quantity demanded. The specified scenario is vice-versa in the case of products having inelastic demand. It means a change in price does not have a significant change in demand for the product.

Price elasticity is the main variant while ascertaining the price which is to be charged from the customer as an inelastic demand allows for a more varied mix of pricing which comprises promotional pricing and discounting (Gillespie, 2014). Further, the price is ascertained after considering the required profitability and desired market share.


Above study depicts that price elasticity of demand plays a vital role in ascertaining the price of the product. Thus is it essential for producer to consider this aspect to make optimum utilization of available resources and to make increase in sales.


This part of study will discuss comparative advantage and absolute advantage by considering relevant example and connectivity of the same with Production possibilities frontiers in order to explain trade benefits.



Difference between comparative advantage and absolute advantage

Absolute advantage refers to the capability of producing more products with the application of less resource in comparison of competing for the entity. On the other hand comparative advantage refers to the capability of producing or manufacturing a specific good at lower  opportunity and marginal cost in comparison to another party.

Suppose Nation 1 and Nation 2 have resources for producing either Computer or Mobile phones, but both options cannot be selected on the simulatneous basis. Nation 1 can make production of 40,000 of computers or 1,00,000 of mobile phones. On the other hand Nation 2 can make production of 30,000 of computers or 1,50,000 of airplanes. PPF for both the nations is as follows:

Figure 1: PPF of nation 1


Figure 2: PPF of nation B

In the present case, both country can select only few combinations if they operate individually but with the trade benefits they will be able to committing 100% of their productivity and can attain higher production for both the products. Option of trade will provide complete specialization to both the countries.


It can be concluded from another part of the report that existence of comparative advantage provide benefit to both the parties from trading as each party will receive good at a price lower than it opportunity cost of producing that goo



Books and Journals

Gelper, S., Wilms, I., & Croux, C. (2016). Identifying demand effects in a large network of product categories. Journal of Retailing, 92(1), 25-39.

Levchenko, A. A., & Zhang, J. (2016). The evolution of comparative advantage: Measurement and welfare implications. Journal of Monetary Economics, 78, 96-111.

Mert, M. (2016). Measuring Economic Growth and Its Relation with Production Possibility Frontier and Returns to Scale.

Gillespie, A. (2014). Foundations of economics. Oxford University Press, USA


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