John Gold has owned and operated Heritage Jewelry Store for a number of years. He uses the standard markup of 300% (known as a triple key in this industry) and uses an average cost that includes an allocation of overhead as the cost base. Lately, jewelry sales at the store have faltered as the country faces a recession. John’s son is taking a cost accounting course and suggests that his father should use a pricing formula based on the price elasticity of demand.
A. In your own words, provide a plausible explanation for John’s current use of cost-based pricing.
B. Explain elasticity to John in simple terms.
C. In your own words, explain how price changes affect demand for products that are highly elastic.
D. Explain why John’s price elasticity of demand cannot be predicted with certainty.
E. List possible reasons why a product’s price elasticity of demand would change. List as many reasons as you can.
F. Explain how changes in the economy affect prices. Give examples from the current business environment.