ECO401 Economics GDB Solution Spring 2014

The Case:

From an economic viewpoint, internet is the opponent of high prices and high profit margins. By greatly expanding the scope of the market, the internet effectively eradicates geographic boundaries, transactional costs and price competition especially for easily transported goods and services. For example, in the pre-internet era, a person looking for a car had to visit the local market or a well-known showroom to look for the best bargain available. With the internet, consumers can now log on to different websites used for internet marketing and get a data on hundreds of good conditioned cars. Successful internet retailers offer bargain prices, a broad assortment of attractive products, and speedy delivery. They also effectively handle profits and basic customer service. The internet is a wonderful communication device that greatly improves access to information about the product quality, prices and performance. . In today’s business world, it is also important to understand how internet marketing can affect price elasticity.


Keeping in view the above scenario of internet marketing, discuss the impact of internet marketing on price elasticity of demand of goods and on profit margins of sellers.

  • Price elasticities are almost always negative; only goods which do not conform to the law of demand, such as a Veblen good and a Giffen good, have a positive PED.
  • In general, the demand for a good is said to be inelastic (or relatively inelastic) when changes in price have a relatively small effect on the quantity of the good demanded.
  • The demand for a good is said to be elastic (or relatively elastic) when changes in price have a relatively large effect on the quantity of a good demanded.
  • A number of factors can thus affect the elasticity of demand for a good.

Price elasticity, also referred to as price elasticity of demand, is a measure of how much consumer demand for a product changes in response to changes in price. If the quantity that consumers order changes a lot in response to a change in price, then the price elasticity is very high. Knowing how consumer demand is related to pricing is a critical part of any business. In today’s business world, it is also important to understand how Internet marketing can affect price elasticity.

Pricing, one of the four major elements of marketing, is a strategic factor determined by the relationship of product features, production costs and the product’s perceived value. The growing importance of the Internet to the marketing mix has added another layer to the task of product pricing. Identifying its effect on the optimum range that customers are willing to pay for a product is known as price elasticity.