Analysis of Price Elasticity of Demand and the Impact of Tariffs

This report examines the price elasticity of demand and its implications for a company importing fruits and vegetables. The analysis focuses on how the company, Fresh Food on the Move, can respond to the imposition of tariffs. The report defines price elasticity of demand and categorizes it as relatively elastic, inelastic, or unitary elastic, based on how quantity demanded changes with price. The estimated price elasticity of demand for food in the U.S. is discussed, highlighting its inelastic nature. The core recommendation to the board is to pass the increased costs from tariffs onto consumers by raising prices, leveraging the inelastic demand to maintain revenue. The report explains how this strategy can offset the cost burden and support profit maximization. The analysis also includes a review of relevant economic literature to support the recommendations.

Running head: THE PRICE ELASTICITY OF DEMAND AND TARIFFS
The Price Elasticity of Demand and Tariffs
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1THE PRICE ELASTICITY OF DEMAND AND TARIFFS
Table of Contents
Elasticity of demand...................................................................................................................2
Recommendation to the Board...................................................................................................2
References..................................................................................................................................4

2THE PRICE ELASTICITY OF DEMAND AND TARIFFS
Elasticity of demand
Fresh Food on the Move is a company that imports fruits and vegetables from Mexico
and sale to large manufacturers who then process those products and sell to the grocery stores
in the United States. Price elasticity of demand is a measure that replicates proportionate
change in quantity demanded of a good because of the corresponding proportionate change in
own price of the good. Depending on extend of change in quantity demanded due to the
change in price demand can be categorized as relatively elastic, inelastic and unitary elastic
(Baumol and Blinder 2015). When quantity demanded changes at a relatively greater
proportion than price then demand is regarded as relatively elastic. For relatively inelastic
demand, proportionate change in quantity demanded of the commodity is less than the
proportionate change in price. When quantity demanded change in exactly same proportion
as price then demand is called unitary elastic. The approximate measure of price elasticity of
demand for food in U.S is 0.15. The estimated measure of elasticity is less than 1. This
implies proportionate change in quantity demanded is less than proportionate change in price
and hence, the elasticity is less than 1. The demand curve therefore is relatively inelastic. The
demand curve in this case is relatively steeper (Kreps 2019). Given the estimated price
elasticity of demand as 0.15, 10% increase in price of food decreases its demand by (0.15 *
10) = 1.5 percent.
Recommendation to the Board
As discussed above the company faces a relatively elastic demand. As food is one of
basic necessities for people, they cannot adjust demand despite increase in price. For every 1
percent increase in price demand decreases by only 0.15 percent. The imposition of tariff
increases company’s cost of imported fruits and vegetables from Mexico. The company can
pass on the increased cost to the consumers in terms of increasing price by the amount of

3THE PRICE ELASTICITY OF DEMAND AND TARIFFS
tariff. Given the relatively inelastic demand the company can pass on all the cost increase
from the tariff in the form of higher price (Cowell 2018). This policy by maintaining a stable
revenue will help to restore profits.
Price elasticity of demand plays an important role in determining changes in revenue
for a given change in price. If demand is relatively inelastic, then demand decreases at a
relatively smaller proportion for an increase in price. As proportionate increase in price
exceeds the relative decline in volume of sales, price increase offsets the decline in quantity
demanded resulting in an increase in revenue and profit. In the given circumstances,
imposition of import tariff adds to the production cost of the company which is likely to
decline the profit. One way to overcome the cost burden is to pass on the burden to the
consumers by raising the price of the food items by the proportion of tariff. As demand is
relatively inelastic, sales volume will not be reduced much due to increase in price (Cowen
and Tabarrok 2015). The higher price therefore results in a higher revenue and helps to bear
the additional cost burden. The strategy thus can help the company in the process of profit
maximization.

4THE PRICE ELASTICITY OF DEMAND AND TARIFFS
References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan
International Higher Education.
Kreps, D.M., 2019. Microeconomics for managers. Princeton University Press.