1. Planning for recession
Many students find this a tricky subject. It is particularly important that before starting this topic you do some background reading from your textbook and other sources on:
Price elasticity of demand
Income elasticity of demand
Elasticity of demand
Planning for recession
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08 December 2018

2. Planning for recession
Consider how sales of a variety of products might be affected by a recession.
In the spring and summer of 2008 Britain was heading for a recession
Spending showed signs of declining due to lost consumer & business confidence
Firms that know the price and income elasticities of their products can try to plan for the likely effects on demand ...
… and then make early decisions about production and marketing strategies
You may wish to consider:
Bus travel
Delicatessen shop
Supermarket own-brand products
Organic food
Walkers crisps
New car sales – Audi v Ford??? *
08 December 2018

3. income elasticity of demand group discussion
Businesses that may benefit include:
DIY retailers (consumers decide to ‘do up’ their current houses rather than move)
Small builders: People build extensions rather than move
DVD rental/pizza delivery: For a cheap Friday night in
Aldi/Lidl: The value supermarkets as consumers watch their pennies
Businesses that may be immune:
Funeral directors – People die in recessions too (although funerals may not be so lavish)
Cigarette manufacturers – addiction may be recession proof
Think about your personal income elasticity of demand
Which goods are luxuries?
Which are necessities/normal goods?
Which are inferior?
Read this article about the UK’s recession
Why might people change their spending habits in a recession?
Might any firms benefit? Are any firms immune?
Reasons include:
Increase in cost of mortgages restricts discretionary income
Anxiety about job loses – people start to save more: service firms suffering
Fall in house purchases – 30% according to Persimmon leading to job losses at building firms and a domino effect in suppliers to these firms
Fall in business investment – has a knock-on effect
‘Recession 'looming' for UK firms’, BBC News, 8/6/08 *
08 December 2018

4. Calculating price elasticity starbucks discussion
“FOR years it seemed that American consumers’ demand for liquid fuel was price inelastic—whether it was to drive their cars or get their brains going in the morning. Yet $4 seems to have been the price at which demand becomes elastic, for both petrol and a frothy latte. As a result, baristas at Starbucks coffee shops around America are starting to get a taste of what it feels like to be a carworker in Detroit.”
Tasks
Discuss the meaning of this quotation
Can you draw a graph that shows the different elasticities for coffee?
Image by visualpanic on flickr.com. Used with permission *
08 December 2018
“Grounds Zero”, The Economist, 3/7/08

5. Price elasticity of demand discussion
How might managers use information about the price and income elasticities of their products?
To what extent should managers base pricing decisions on price and income elasticity information? *
08 December 2018

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08 December 2018
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