Question

FreshLeaf is a commercial salad maker that produces "salad in a bag" that is sold at many local supermarkets. Its customers like lettuce but don't care so much what type of lettuce is included in each bag of salad, so you would expect FreshLeaf's demand for iceberg lettuce to be: a. Elastic. b. Inelastic. c. Unit elastic. d. All of the above.

Short answer

b. Elastic

Step-by-step solution

Identify the Concept

The problem involves understanding the price elasticity of demand for iceberg lettuce in the context of FreshLeaf's salad products. Price elasticity of demand measures how sensitive the quantity demanded is to a change in price.

Understand Customer Preferences

Mention that FreshLeaf's customers are not concerned about the type of lettuce. This suggests that there are many substitutes (like other types of lettuce). More substitutes generally mean higher elasticity.

Relate Substitutes to Elasticity

Since many types of lettuce can serve as substitutes and customers don't have a strong preference for iceberg lettuce, the demand for iceberg lettuce would be more elastic. This means customers could easily switch to other types of lettuce if prices change.

Conclusion Based on Elasticity

Given the availability of substitutes and the lack of strong preference for a specific type of lettuce, the demand tends to be elastic. Therefore, the correct answer would be that FreshLeaf's demand for iceberg lettuce is elastic.

Key concepts

Elasticity

Elasticity is a key concept in economics that describes how the quantity demanded or supplied of a good responds to changes in price. When we talk about the price elasticity of demand, we're exploring how much the amount of a product people buy will change if the price goes up or down.

There are a few types of elasticity:

• Elastic: A small price change leads to a big change in quantity demanded. This happens when there are many alternatives available to consumers.
• Inelastic: A price change doesn't significantly affect the quantity demanded. This is common for essentials or items with few substitutes.
• Unit elastic: A price change leads to an equivalent proportional change in quantity demanded.

Understanding elasticity helps businesses like FreshLeaf make strategic decisions about pricing and product offerings.

Substitute Goods

Substitute goods are different products that serve similar functions or satisfy similar needs for consumers. When one product is a substitute for another, consumers can easily swap between them depending on price changes or preferences.

For FreshLeaf, any type of lettuce other than iceberg can be considered a substitute. When substitutes are readily available, it means that the demand for a specific product—like iceberg lettuce—becomes more elastic.

• Substitutes make it easier for consumers to switch if a particular product's price rises.
• Businesses need to be aware of the substitutes available, as this can affect their sales and pricing strategies.

In essence, having substitutes means consumers have more choices, which affects how sensitive they are to price changes in any one product.

Consumer Preference

Consumer preferences refer to the tastes and choices made by individuals when it comes to buying products. These preferences determine what, how, and why consumers purchase certain goods over others.

For FreshLeaf, understanding that customers are indifferent about the type of lettuce used in their salads is crucial. This implies that they do not have strong preferences toward iceberg lettuce, thus making the demand for it more elastic. When preferences are weak or indifferent:

• Consumers are more likely to switch to alternatives if one becomes more expensive.
• Price and availability become significant factors influencing purchase decisions.

Comprehending consumer preferences helps businesses tailor their product offerings more effectively to meet market demand.

Economic Analysis

Economic analysis involves using economic theories and models to understand how markets function and predict the potential effects of changes in economic variables, such as price, on consumer behavior and market dynamics.

In the context of FreshLeaf's demand for iceberg lettuce, economic analysis can be applied by examining the elasticity and substitute goods available, as well as consumer preferences.

• By analyzing these factors, businesses can forecast demand changes based on price fluctuations.
• This analysis assists in making informed decisions regarding pricing strategies and inventory management.

In summary, economic analysis provides valuable insights that help businesses like FreshLeaf adapt to changes in market conditions and consumer behavior.