The concept of demand elasticity is vital in determining prices of joint products like cotton and cotton seeds. In this scenario, individual cost of producing each product is known. Consequently, the price of each commodity is fixed based on its elasticity of demand. As Shivam (2021) asserts, the profits from international trade heavily depend on the elasticity of demand such that a country stands to gain from the trade if it exports goods with less elasticity since it has the latitude to charge high prices for the products and import those goods whose demand is elastic and therefore cost less in the market. This strategy makes a country increase the volume of inter-country trade. Changes in market price influences the demand of a product or a service. The elasticity of demand can be beneficial because producers can know the amount of goods to be produced corresponding to its demand, as a result optimum production is achieved.
Drawbacks Associated with Costs of Setting Prices .
Downplaying competition, a company can base its prices on cost formulas and later realize the disparity in prices between itself and its competitors. This is damaging to any business because they either end up charging higher prices and losing customers or charging less on its products and suffering losses. According to Guo (2021), this technique ignores replacement costs because it is generally based on historical costs of its products. Likewise, cost based approaches ignore value because of their tendencies to be inflexible and therefore it might become difficult to introduce a new and durable product whose initial value might be high but long-lasting.
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References
Guo, V. (2021). What is Cost plus pricing + 3 Advantages of Cost plus Pricing. Retrieved 31 May 2021, from https://www.priceintelligently.com/blog/bid/161014/cost-plus-pricing-101-the-necessities-and-your-pricing-strategy
Shivam. (2021). What is the Importance of Elasticity of Demand?. Retrieved 31 May 2021, from https://www.economicsdiscussion.net/elasticity-of-demand/what-is-the-importance-of-elasticity-of-demand/21813
