Practise explaining price discrimination, income elasticity and pricing analysis for IB Business Management HL decisions.
EcoCycle
Dan Perdue is a sole trader who sells bicycles. His unique selling point (USP) is bicycles that are made from recycled materials using environmentally friendly processes. Dan's customers are willing to pay high prices for these types of bicycles, and they have a price inelastic demand. Currently Dan purchases the bicycles from GreenRide, a local manufacturer. GreenRide bicycles are well made, rarely have defects, and are well known to environmentally conscious cyclists. The income elasticity of demand for Dan's bicycles is greater than one.
Table 1: financial data for Dan's bicycles, for 2015:
The economy is forecasted to grow in the upcoming years. To take advantage of the growth potential, Dan is considering forming a partnership with David Brown, a skilled mechanic who knows how to manufacture bicycles. Both Dan and David would be equal partners and split the profits. The partnership will begin on 1 January 2016 and would trade under a newly created brand, EcoCycle. Recycled materials and environmentally friendly processes would be used to manufacture all the EcoCycle bicycles.
Table 2: forecasted financial data, for EcoCycle bicycles, for 2016:
Dan, however, conducted primary market research which indicated that respondents were only willing to pay a much lower price for the untested, unknown brand EcoCycle.
Explain one benefit for Dan of the income elasticity of demand for his bicycles being greater than one.