Ford Motor Company announced a major rebate program for its cars and trucks. The rebate program amounts to a simple reduction in price. The company executives hope to increase revenue as a result of this rebate program.
What economic explanation would justify this decision ?
As per the scenario, Ford Motor assumes that by introducing a major rebate program, for it’s various products such as cars and trucks, the revenue of the company will increase. The main reason why the executives of the company assume that the revenue of the company will increase with introduction of the rebate program is due to the fact , automobiles are elastic.
Let us understand the elasticity of the automobiles with the help of the relationship between the consumer’s total expense and the price of the product:
What does Elasticity mean? Ineconomic terms, elasticity generally the responsive nature of demand and supply of a product or a service, in relation to increase in decrease of the price. In other terms, elasticity measures the change in the percentage of the quantity of the product due to the change in the percentage of the price of the product. Additionally, to calculate total expenditure, the formula used is Price of the product multiplied by the quantity of the product. Hence, naturally, changes in total expenditure can be due to any change in the price or the quantity or both. For instance, the lower the price, the lower the total expenditure and higher the price, higher the total expenditure.
Given in the case of Ford Motors, the percentage of price change is lower than the percentage of the quantity change. Hnece, quantity clearly is more than the price, the effect on total expense is that it increases as the quantity is more than the price with a higher elastic demand.
Hence, by understanding the explanation given above, it is clear that the entire expense or the total expenditure done by all the customers is considered as the total revenue of the company. (In this case the company is Ford). This is the primary reason why executives has initially assumed that a result in decrease in price due to rebate will help the firm to sell more products and as a result the revenue of the company (In this case the company is Ford) will increase. Hence, this predication will be considered correct.