Pick two products: one that is relatively price inelastic and another that is relatively price elastic. You should begin by defining your product, in terms of the determinants, and then describe how increases in the price would affect total revenue. Would it make good business sense to be the one producing and selling these products? Why or why not?

The main determinant of demand elasticity is the availability of close substitutes. If a good has many close substitutes, it will have an elastic demand and if it does not the demand is inelastic. There are other factors that can cause the demand to be elastic or inelastic which include: portion of the budget, time to make the purchase, luxury or necessity and the specificity of the product. Most goods and services actually have both inelastic and elastic portions of their demand curves, it depends on the price level and elasticity can be calculated based on changes in the quantity relative to the price.

Elastic Demand Product: Many products have an elastic demand. Seafood restaurant dinners are an example of a product that has an elastic demand. There are many substitutes for this type of dinner including eating at home. Based on the revenue test of elasticity, if these type of restaurants raise their prices they are likely to earn less revenue as consumers seek out other substitutes. Faced with an elastic demand, firms will earn higher revenue when they lower their prices so the substitution effect works in the other direction. In communities which are not next to the ocean, seafood is harder to obtain for the restaurant so this type of firm can be an expensive operation. If the entrepreneur can obtain cheaper fish and set up in a community with fewer direct competitors they can earn positive profits, however the more competitive the market is, the harder it will be to sustain the profits.

Inelastic Demand Product: Other products have an inelastic demand. Baby formula has a very inelastic demand since there is only one substitute and it is not always available to all parents. If the price of the formula increases, the producers will earn more revenue since the quantity purchased will not fall as much as the price increase. It does make good sense to sell this product, however there are already producers in the market so it might be difficult for an entrepreneur to begin selling formula. There might also be higher regulatory costs selling food products to infants.