Friday, June 4, 2010

Compact Disc's & Price Elasticity

An article in the Financial Times is reporting that Universal Music Group is planning on decreasing the price of compact disc's by 17% to 29% or from ($11.98 - $13.98) to $9.98, and this has increased sales of compact discs by almost 100%. From this information, what can we infer about the price elasticity of demand for compact disc's?

Using the total revenue (sales) test, we know that when the price of a good decreases and that leads to an increase in the total revenue of that good, then the good is price elastic. Thus, since the decrease in price of compact disc's is resulting in an increase in the total revenue of compact discs we can infer that the demand for compact disc's is price elastic; or that consumers of compact discs are relatively sensitive to changes in the price of compact discs.

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