The economic nature of your products and services and its implications on sales and revenues.

1. THE ECONOMIC NATURE OF YOUR
PRODUCTS AND SERVICES AND ITS
IMPLICATIONS ON SALES AND REVENUES.
By kanb frank

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3. Some of the factors that come into consideration before an individual or a firm makes
a purchase
The price of the product or service as compared to
its value or the satisfaction the consumer would
derive from using it.
The price of related goods or services that serve
the same purposes.
 Consumers income level or purchasing power.
Seasons of need concerning particular products or
services.
Taste and preferences and the consumption habit
of the consumer.

4. Definition of keywords
 SALES: It refers to the total revenues generated by selling of
products and services to consumers.
 CONSUMERS: They are buyers and users of products and services
of producers. They consume the goods and services provided by
suppliers.
 DEMAND: It is the quantity of a commodity or service that
consumers are willing and able to buy at a given price and over a
given period of time. It is important to understand that demand is
not the same as the desire to own something but rather, the desire
should be backed by purchasing power or willingness and ability to
pay for the commodity or service.
 DISPOSABLE INCOME: This refers to income after tax.

5. INFERIOR GOODS AND SERVICES
These are goods and services that are considered by consumers
to be inferior to other similar goods and services that can be
replaced to satisfy the same demands of consumers. Therefore,
when the disposable incomes of consumers rises, quantity
demanded of inferior goods and services decreases, likewise
when their disposable incomes falls, quantity demanded of
inferior goods and services increases ,this is because consumers
at the current disposable income level cannot afford normal
goods and services .
NORMAL (SUPERIOR) GOODS AND SERVICES
These are goods and services that have a Positive income effect,
meaning that more of them are demanded when consumer’s
disposable incomes rises and less quantity demanded when their
disposable income falls.

6. NECCESSITY GOODS AND SERVICES
These are essential and indispensable goods and services that consumers cannot
avoid them. They are basic necessities of life whose demand is not affected by
changes in consumer’s income. This means that, when consumer’s disposable
incomes increases or decreases they will still need to consume those goods and
services. Examples are food, fuel, salt, drugs, shelter etc.
OSTENTATIOUS GOODS AND SERVICES
People sometimes attach price with value or tries to achieve high standing in the
society base on the goods and services they consume. As a matter of fact, not
everybody in the society can consume these prestigious and luxurious goods and
services that is why those who own them feel valuable and important. Due to this
feeling, when the price of these goods and services falls, less quantity is demanded
and at a high price more quantity is demanded. Nevertheless, after a position, the
price becomes so high that consumers cannot accept any further increase in price
and therefore any additional increase in price of these goods and services causes
quantity demanded to fall.

7. The main problem of economics arises out of the fact that
human wants are unlimited and people’s means of satisfying
these wants are limited. Due to this, individuals and firms are
compel to make a choice that will yield them the maximum
satisfaction. Since resources are scarce and wants are unlimited, it
is assumed that every rational consumer will manage his or her
scarce resources well to obtain the best possible satisfaction from
their use.
Because the consumer’s behavior is to maximize satisfaction in
regard to the use of his or her limited resources, the quantity
demanded of products and services which determine the total
revenues or sales of a business operation would be greatly
influenced by factors such as price of the commodity, income of
the consumer and the price of related goods and services.

8. Elasticity of demand
It has already been established that purchasing decisions of
consumers in regard to quantity demanded of products and
services will normally vary as a result of the price of the
products or services, income of the consumer and the price of
related products or services. This means that, all things being
equal, quantity demanded of products and services will either
increase or decrease when there are changes in these
variables which are the price of the products or services,
income of the consumer and the price of related or similar
commodities or services.
Elasticity of demand is mainly concerned with the degree or the
extent to which quantity demanded of products and services
increases or decreases to small changes in these variables I
just mentioned, that is, the price of the commodities or
services, income of the consumer and price of related or
similar commodities or services.

9. Price elasticity of demand
As it has already be explained, price elasticity of demand is the degree or the extent to
which quantity demanded of products and services increases or decreases to small
changes in the price of the commodity or services.
Price elasticity of demand of products and services can be determine the by the
application of numerical measurements in two ways.
 Measurement of price elasticity of demand using point elasticity of demand.
The point elasticity of demand describes the elasticity of demand at point.
This is measured by the formula: proportional change in quantity demanded
Proportional change in price
PED = DQ × P
DP q
DQ means difference or changes in quantity demanded of goods and services.
DP means difference or changes in price of goods and services.
P stands for initial price and q also stands for initial quantity.

10.  Measurement of price elasticity of demand using arc or midpoint
elasticity of demand.
It measures the average responsiveness of quantity demanded of a
commodity or service to changes in price between two points on the
demand curve.
This is measured by the formula: DQ × P1 + P2
DP Q1 + Q2
DQ means difference or changes in quantity demanded of goods and
services.
DP means difference or changes in price of goods and services.
P1 stands for initial price. P2 stands for new and current price.
Q1 stands for initial quantity. Q2 also stands for new or current
quantity.

11. TYPES OF PRICE ELASTICITY OF DEMAND
One without the knowledge of price elasticity may simply
consider that higher prices of products and services will
always result in greater total revenues or sales. However, this
is usually not the case but the other way around. In fact
uncertainties involve in pricing decisions by businesses can be
anticipated and lessened if managers have thorough
understanding about price elasticity of demand and its
implications on total revenues or sales.
There are five main types of price elasticity of demand. These are
price elastic demand, price inelastic demand, unitary elastic
demand, perfectly elastic and perfectly inelastic demand. A
product or service may fall under one of these types of
elasticity of demand.

12. PRICE ELASTIC DEMAND
A product or service is said to be price elastic demand when a small
percentage change in price causes a greater percentage change in
quantity demanded of it. Example: Two percent (2%) fall in price
causes five percent (5%) increase in quantity demanded of the product
or services, likewise two percent increase in price causes five percent
decrease in quantity demanded of the product or service.
When numerically measured by the formulas I presented above, the
elasticity coefficient is greater than one but less than infinity.
(1 ˂ P.ED ˂ ∞).
Examples are products and services with substitutes.
Total revenue increases when price falls and decreases when price
rises.

13. PRICE ELASTIC DEMAND
DIGRAM
From the diagram, price falls by a smaller percentage from p2 to p1 and quantity
demanded increases by a greater percentage that is from q1 to q2. On the other
hand, when the price of the product or service increases from p1 to p2, quantity
demanded of the product or service decreases from q2 to q1.
Total revenue increases when price falls and decreases when price rises.
PRICE P
P2
P1
D
0 q1 q2 QTY QUANTITY

14. PRICE INELASTIC DEMAND
A product or service is said to be price inelastic demand when a
percentage change in price causes a smaller percentage change
in quantity demanded of it. This means that quantity demanded
of products and services is less responsive to price changes.
Example: Three percent (3%) fall in price causes one (1%)
increase in quantity demanded of the product or services,
likewise three percent (3%) rise in price causes one percent (1%)
decrease in quantity demanded. The elasticity coefficient is
greater than zero but less than one. (0 ˂ P.ED ˂ 1).
Examples are products and services with little or no substitutes.
Total Revenue Increases when Price rises and Decreases When
Price Falls.

15. PRICE inELASTIC DEMAND
DIGRAM
PRICE P
P2
D
P1
O q1 q2 QTY QUANTITY
From the diagram, price falls from p2 to p1 and quantity demanded
increases by a smaller percentage from q1 to q2. likewise, when the price
increases from p1 to p2, quantity demanded of goods and services
decreases by a smaller percentage from q2 to q1.
Total Revenue Increases when Price rises and Decreases When
Price Falls.

16. UNITARY ELASTIC DEMAND
The demand for a product or service is said to be unitary
elastic when a percentage change in price causes a
same percentage change in quantity demanded.
Example: A four percent fall in price brings about four
percent increase in quantity demanded, likewise four
percent rise in price induces four percent fall in
quantity demanded. The elasticity coefficient is equal to
one. (P.ED =1)
Total revenue remains the same when prices rises or
falls.

17. UNITARY ELASTIC DEMAND DIAGRAM
PRICE P
P2
P1
D
0 q1 q2 QTY QUANTITY
From the diagram, price falls from p2 to p1 and quantity demanded increases
from q1 t0 q2. The increase in quantity demanded is proportionally equal to
the fall in price from p2 to p1. Likewise an increase in price from p1 t0 p2
will induce a percentage decrease in quantity demanded from q2 to q1 equal
to the percentage rise in price from p1 to p2.
Total revenue remains the same when prices rises or falls.

18. PERFECTLY PRICE ELASTIC DEMAND
The demand of product and service is said to be
perfectly elastic when a small change in quantity
bring about an infinite change in quantity
demanded. This means at a small change in price
consumers will buy as many as they want of the
commodity.
The elasticity coefficient is infinity (P.ED =∞). The
demand curve is horizontal.
Total revenue increases when more is demanded.

19. PERFECTLY PRICE ELASTIC DEMAND
DIAGRAM
PRICE P
P1 D
O q1 q2 QTY QUANTITY
From the diagram, it is clear that at the same price consumers buy
as many as possible of the commodity.
The elasticity coefficient is infinity (P.ED =∞).
Total revenue increases when more is demanded.

20. PERFECTLY PRICE INELASTIC DEMAND
When a change in price does not bring about any change in
quantity demanded, a commodity or service is said to
have perfectly price inelastic demand. This means that,
quantity demanded of products and services is the same
irrespective of price changes.
In other words an increase or decrease in price induces
zero increase or decrease in quantity demanded.
The elasticity coefficient is equal to zero
(P.ED =0). The demand curve is vertical.
Total revenue increases when price rises.

21. PERFECTLY PRICE INELASTIC DEMAND DIAGRAM
PRICE P
D
P2
P1
0 q1 QTY QUANTITY
From the diagram, it is obvious that quantity demanded of the
commodity remains the same irrespective price changes.
The elasticity coefficient is equal to zero (P.ED =0).
Total revenue increases when price rises.

22. NOTE
We should understand that perfectly price elastic and
perfectly price inelastic demand are extreme cases of
elasticity of demand and not capable of occurring in
practice.
This is because it is not easy to make reference to any
product or service that has perfectly elastic or perfectly
inelastic demand. Therefore, Price elastic, inelastic and
unitary elastic are the types of elasticity of demand we have
in practice.

23. USES OF PRICE ELASTICTIY OF DEMAND
Output enlargement or contraction
Because of the knowledge one has in the elasticity of demand, a
manager may decide to increase or decrease the quantity of his or
her outputs after determining and considering the price elasticity
of demand for his products or services.
Pricing of products and services
Knowledge of price elasticity of demand equips management of
businesses and companies with the understanding of pricing and
its effects on quantity demanded of products and services and also
on total revenue. This knowledge therefore enables them to take
proper pricing decisions of their products and services in order to
increase their total revenue or sales.

24. INCOME ELASTICITY OF DEMAND
Other things being equal, when consumer’s incomes rises they tend to consume more of normal
goods and services than inferior goods and services; similarly, a fall in the disposable
incomes of consumers also causes them to spend more on inferior goods and services as
compared to normal goods and services.
Therefore, income elasticity of demand can be defined as the degree or the extent to which
quantity demanded of a commodity or service increases or decreases as a result of changes in
consumer’s disposable incomes.
The mathematical calculation of income elasticity of demand follows the same mode as price
elasticity of demand that is the percentage change in quantity demanded of a commodity or
service is divided by the percentage change in the consumer’s income.
This is measured by the formula: proportional change in quantity demanded
Proportional change in income
Y.ED = DQ × y
DY q
DQ means difference or changes in quantity demanded of goods and services.
DY means difference or changes in incomes of consumers.
Y stands for initial income and q also stands for initial quantity.

25. Measurement using the arc elasticity concept
Y.ED = DQ × Y1 + Y2
DY Q1 + Q2
DQ means difference or changes in quantity demanded
of goods and services.
DY means difference or changes in incomes of
consumers.
Y1 stands for initial price. Y2 stands for new and
current price.
Q1 stands for initial quantity. Q2 also stands for new or
current quantity.

26. TYPES OF INCOME ELASTICITY OF DEMAND
With income elasticity of demand, a commodity
can be said to be normal (superior), inferior or
necessity depending upon the mathematical
coefficient. Thus, income elasticity can be
negative, positive or zero.

27. INFERIOR GOOD
From the diagram, it is obvious that when consumers incomes falls from Y2 to
Y1 quantity demanded of the good increases from Q1 to Q2.This is an
indication that the good is an inferior good and that consumers will demand
more of it when their incomes falls and less of it when their incomes rises.
With inferior goods the income elasticity coefficient is negative. ( Y.ED
˂ 0 )
INCOME Y
Y2 D
Y1
O Q1 Q2 QTY QUANTITY

28. NORMAL OR SUPERIOR GOOD
From the diagram, it is clear that when consumer’s incomes
rises from Y1 toY2, quantity demanded of the good increases
from Q1 to Q 2. This is an indication that the good is a
normal or superior good and that consumers will demand
more of it when their incomes rises and less of it when their
income falls. With normal or superior goods the income
elasticity coefficient is positive. (Y.ED ˃ 0 )
INCOME Y D
Y2
Y1
O Q1 Q2 QTY QUANTITY

29. NECESSITY GOOD
From the diagram above, it can be clearly seen that whether price
increases from Y1 to Y2 or decreases from Y2 to Y1, it has no
effect on quantity demanded of the good. Therefore the good is
said to be a necessity good. The income elasticity coefficient is
zero. (Y.ED = 0)
INCOME Y
D
Y2
Y1
O Q QTY QUANTITY

30. CROSS ELASTICITY OF DEMAND
When a change in price of a commodity induces a change in quantity demanded of another
commodity then demand for the commodity is said to be cross elastic. It measures the
degree to which two commodities are related and how a small change in the price of one
of them causes changes in the quantity demanded of the other related commodity.
This is mathematically measured by dividing the proportional change in quantity demanded
of a commodity by the proportional change in the price of its related commodity.
This is measured by the formula: proportional change in quantity demanded of commodity X
Proportional change in price of commodity Y
Cross .Ed of commodity X and Y = DQx × Py
DPy Qx
DQx means difference or changes in quantity demanded of commodity X.
DPy means difference or changes in price of commodity Y.
Py stands for initial price of commodity Y.
Qx also stands for initial quantity of commodity X.
The elasticity coefficient of cross elasticity of demand can be positive, negative or zero.

31. CLASSIFICATION OF CROSS ELASTICITY OF DEMAND
If the cross elasticity coefficient of two commodities say meat and fish
is positive then it means meat and fish are substitutes. This means,
when the price of meat increases, the quantity demanded of fish will
increase and vice versa. This is because both meat and fish serve the
same purpose and consumers will tend to buy the one with low
price.
Moreover, if the cross elasticity coefficient of two commodities say and
car and petrol is negative then it means car and petrol are
complementary goods. This means, when there is an increase in
price of say petrol, the quantity demanded of cars will decrease and
vice versa. This is because they are consumed together by the
consumer; therefore price of one of good say car inversely affects
the quantity demanded of the other say petrol.
On the other hand, if the coefficient of the cross elasticity of demand is
zero then that means, there is little or no relationship between the
two commodities under consideration. Example: Shoe and Milo.

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