Demand And Price Elasticity Of Demand Economics Essay

If the product is considered to be a luxury good, or a necessity will effect PED. Usually luxury products have greater elasticity. Some products that are not actual necessities can become a necessity to consumers/customers, for example cigarettes.

The availability of substitutes, the more ‘substitutes’ there are available for a particular product; the greater the elasticity.

If the price change is a permanent price change QD will have a different response than if the price was being dropped for example a one-day-sale.

There is a relationship between PED and total revenue, for example if the demand for a product is inelastic, a rise in price leads to a rise in total revenue whereas is the demand for a product is elastic, a fall in price leads to a rise in total revenue.

Wine merchants have devised a pricing strategy due to the trouble occurring in the Bordeaux wine trade. Wine from Chateaux has been threatened to be boycotted unless they considerably drop their prices to 2002 levels. They are willing to sell their 2008 wines at 2002 prices which puts the wine at a loss but they do not have much of a choice as a French wine industry source states “There won’t be any customers if the price is any higher”. From this pricing strategy it seems that Bordeaux wine is an elastic product, meaning the PED would be low, which I think contradicts itself because Bordeaux wine in in fact an inelastic (high PED) product as no-one else in the world can produce Bordeaux wine because obviously it has to be produced from the region of Bordeaux.

(P) Demand Curve for Bordeaux Wine

(P) – Price

(D) – Demand

(QD) – Quantity Demanded

(D)

(QD)

The demand curve (line) is steep as Bordeaux wine is considered to be an inelastic product. This is because from 2002 and the following years, the price has increased gradually and the quantity demanded has dropped but not significantly, meaning that the price change does not have a massive effect on the QD. Bordeaux Wine is considered an inelastic product because no-one else in the world can produce Bordeaux wine because it has to be produced from the Bordeaux region.

Demand Curve for Bordeaux Wine Showing a Shift

(P) (P) – Price

(D) – Demand

(QD) – Quantity Demanded

(D1) – New Demand Curve

(D1) (D)

(QD)

The demand curve can shift, either to the left or right as the QD increases or decreases at a given price. A shift occurs when there is a change in an influencing factor, other than price.

There are many factors that can cause the demand curve to shift;

Number of potential buyers – an increase in market size or population can shift the demand curve to the right, similarly a decrease in market size can cause a shift to the left.

Expectations of a price change – for example a news report predicting higher prices in the future can increase the current demand as customers increase the quantity they purchase now with the lower price before it rises.

Prices of related goods; if there is an increase in the price of a substitute product, this will increase demand, shifting the demand curve to the right. Similarly an increase in the price of a complement reduces demand, shifting the curve to the left.

Income, if the average disposable income is dropping, consumers will have less money to spend on the wine; considered a luxury product, causing the demand to shift to the left.

I have found a lot of evidence throughout the case study which indicated that the demand for Bordeaux wine has changed. The majority of the evidence concludes that the Bordeaux Wine industry is at a low point.

There is a range of evidence throughout the Bordeaux wine article that indicates that the demand for Bordeaux wine has changed. Most of this evidence states that the Bordeaux wine industry is suffering.

Estève who runs an online wine business in Bordeaux believes, “”The problem was with the 2006 and 2007. They were average years – 2007 was an extremely average year – but the prices stayed very high.”” (Sage, 2009). Due to the wine being of an average quality, but the prices still remaining high, consumers were much less likely to purchase the wine causing a decrease in demand.

Local super markets also noticed the drop in demand for the wine, “Tesco estimated that 100,000 drinkers had dropped out of the market.” (Sage, 2009) Director of Brand Phoenix, a wine importer and brand owner, Greg Wilkins, described, “”The ‘on’ trade [wine sold through restaurants and pubs] is suffering most. The ‘off’ trade is reasonably stable although we’re seeing pretty much zero growth.” Difficulties have been compounded by the fall of sterling.” (Sage, 2009). Relating to the factor of Income, mentioned in part B, the fall of sterling could mean that consumers that would ordinarily purchase wine in restaurants and pubs can no longer afford that ‘luxury’ and are therefore moving to “New World Wines”.

In 2009 the demand for Bordeaux wine soared in China. With Chinese investors ‘scooping up the vineyards across Bordeaux’ they purchased Chateaus and in general, the wine became extremely popular.

Bordeaux became a hot spot; the most popular type of wine. China’s consumers swallowed up 20% of Bordeaux’s exports in the past year which is a 122% jump from the year before. This made China become the biggest importer of Bordeaux wine by volume. (BusinessWeek, n.d.)

This would cause the demand curve to shift to the right as the demand has increased vastly by another influencing factor, not price.

“The recent financial crisis coupled with today’s turbulent financial market is leading to a growing demand for recession proof investments. Therefore, it is no surprise that an increasing number of investors are reaching towards Bordeaux fine wines not only due to the financial stability and immense capital appreciation, but also for its recession proof nature.”

One of the main reasons why luxury wine is considered to be ‘recession proof’ is because the investment wine market is unaffected by the financial climate and conditions. Unlike traditional investments, luxury wines are minimally influenced by exchange and interest rate changes. (Anon., n.d.) From this I gather that even if the economy were to drop back into a recession, Bordeaux wines would not be affected as much as other investments, meaning the demand should stay stable.

“In this paper we attempt to evaluate if Bordeaux wines prices are more impacted by expert opinions than prices of wines from other regions of France or from other countries. Two hypotheses can be formulated. On the first hand, we can guess that fine Bordeaux wines prices are less impacted than others because of their great and historic reputation and the increasing demand from China and other emerging markets. Whatever happens, prices stay high and quite stable. On the other hand, we can imagine that fine Bordeaux wines prices are more volatile precisely because they are under the spot lights and because they can be seen as speculative assets. Then even a minor change in the rating of a wine induces a large demand move. This hypothesis could be view as a high elasticity hypothesis. The first one is a low elasticity hypothesis.” (Figuet, n.d.)

From this you can see that Bordeaux wine can be seen as both an elastic and inelastic product. Meaning the demand curve can vary from being steep (nearer to vertical) and more gradual (nearer to horizontal) depending on the hypothesis.