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Rising pork prices have led to a decrease in the number of farmers raising ducks and geese. Consequently, the price of feather shuttlecocks in China has increased by 40%. Feather shuttlecocks are typically made from 16 overlapping feathers, usually sourced from geese or ducks.

(a) Explain what might cause price elasticity of demand and cross elasticity of demand to vary for different products. [10]

Introduction

Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its own price, ceteris paribus, while Cross Elasticity of Demand (XED) measures how the quantity demanded (demand) of one good responds to a change in the price of another good. In the context of the rising prices of feather shuttlecocks in China, which are made from duck and goose feathers, the PED and XED of different products may vary significantly due to several factors.

PED

PED varies across products for several reasons. In the case of feather shuttlecocks, PED reflects how sensitive the demand for shuttlecocks is to changes in their price. This is calculated as the percentage change in quantity demanded over the percentage change in price, with the sign always negative due to the inverse relationship between price and quantity demanded (law of demand).

If the PED for feather shuttlecocks is inelastic (PED < 1), a price increase, such as the recent 40% rise, would lead to a less than proportionate fall in quantity demanded. This could be due to the necessity of shuttlecocks for badminton players, who may not reduce their consumption significantly despite higher prices. On the other hand, if demand is elastic (PED > 1), a price rise would result in a more significant drop in quantity demanded, which might occur if alternatives to feather shuttlecocks (such as nylon ones) are readily available.

Several factors influence PED for shuttlecocks. First, the degree of necessity: for professional players who prefer feather shuttlecocks for their superior quality, the demand might be more inelastic as they are essential for performance. In contrast, recreational players might find them less of a necessity and switch to cheaper alternatives, making the demand more elastic.

Second, the proportion of income spent on shuttlecocks can also influence PED. Feather shuttlecocks, being more expensive, may represent a significant portion of a consumer's budget, especially for frequent players. If the price continues to rise, demand may become more elastic as consumers become more sensitive to price changes.

Third, the availability of substitutes can also affect PED. Nylon shuttlecocks, which are cheaper and more durable, could serve as substitutes. If players find that nylon shuttlecocks provide an acceptable performance, the demand for feather shuttlecocks would become more elastic, as consumers can easily switch to the cheaper alternative in response to the price hike.

XED

Cross Elasticity of Demand (XED) examines how the demand for one product responds to a price change in another. In this context, XED helps us understand the relationship between feather shuttlecocks and other goods, such as nylon shuttlecocks. XED can be positive or negative, depending on whether goods are substitutes or complements.

For instance, feather and nylon shuttlecocks are substitutes, and XED would likely be positive. A 40% increase in the price of feather shuttlecocks may cause an increase in the demand for nylon shuttlecocks, depending on how close substitutes they are. If they are not perfect substitutes, the XED would be positive but relatively low, meaning the shift in demand might not be dramatic. However, if players find nylon shuttlecocks to be a viable alternative, the XED could be higher, indicating a stronger substitution effect.

On the other hand, if we consider badminton rackets and shuttlecocks, these goods are complements. A rise in the price of shuttlecocks might reduce the demand for rackets, especially among casual players who might forego playing the sport altogether due to higher costs. This relationship would be reflected in a negative XED, showing the complementary nature of these goods.

Conclusion

In conclusion, the price elasticity of demand (PED) and cross elasticity of demand (XED) can vary widely depending on factors such as the degree of necessity, the proportion of income spent, the availability of substitutes, and the relationship between goods. In the case of rising feather shuttlecock prices, these factors will influence how players respond to price changes and whether they switch to alternatives like nylon shuttlecocks. Understanding these variations is crucial for businesses involved in the shuttlecock market to make informed pricing and production decisions.