In an article about the financial problems of USA Today, Newsweek reported that the paper was losing about $20 million a year. A Wall Street analyst said that the paper should raise its price from 50 cents to 75 cents, which he estimated would bring in an additional $65 million a year. The paper’s publisher rejected the idea, saying that circulation could drop sharply after a price increase, citing The Wall Street Journal’s experience after it increased its price to 75 cents. What implicit assumptions are the publisher and the analyst making about price elasticity?
The publisher and the analyst are making implicit assumptions about price elasticity in relation to the newspaper industry. Price elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price.
The analyst assumes that the demand for USA Today is relatively price inelastic. This means that the price increase from 50 cents to 75 cents is not expected to have a significant impact on the quantity demanded. The analyst estimates that the price increase will generate an additional $65 million in revenue, suggesting that he believes the demand for USA Today is relatively insensitive to price changes.
On the other hand, the publisher's rejection of the price increase idea implies that he believes the demand for USA Today is price elastic. He argues that increasing the price could result in a sharp drop in circulation, citing The Wall Street Journal's experience as an example. A price elastic demand means that consumers are more responsive to price changes, and a price increase may lead to a significant decrease in quantity demanded.
In summary, the analyst assumes that the demand for USA Today is relatively price inelastic, while the publisher assumes that it is price elastic. Both assumptions have different implications for the potential impact of a price increase on revenue and circulation.