Elasticity and Demand

Elasticity and Demand

Deciding whether or not it is prudent to increase commodity prices to increase profits can be a tricky affair for managers and business owners. In this particular scenario where the owner of a certain restaurant must develop a come-back strategy after COVID-19, there are several factors that must be considered. The key factor to determine how effective increasing prices will be is the elasticity of demand. Demand for products is said to be elastic if it changes significantly following a price change (Hall, 2021). This means that commodities for which a variety of substitutes are available tend to be more elastic in terms of demand.

In the present scenario, raising menu prices would not be the best idea, the reason being that most customers would shift to eating at home rather than buy expensive food from a restaurant. This is likely to be the case if the restaurant offers foods that are offered in other eating places. Another key point to consider is income effect: given that people across the world have been badly hit by the pandemic-with many being laid off and businesses going down, it is likely that not many customers will be willing to pay more on food, which they can still make at home.

Taking into consideration the above factors, and further given that there are several other popular restaurants in the area, the better option would be to lower menu prices. This way, more customers would be attracted and this increase in volume would arguably result into more sales. Although this might not generate enough revenue to cater for all the costs that the restaurant owner has to pay, additional strategies such as aggressive advertising, for example, may help to boost demand.

Reference

Hall, M. (2021). Elasticity vs. inelasticity of demand: what’s the difference? www.investopedia.com/ask/answers/012915/what-difference-between-inelasticity-and-elasticity-demand.asp