Assess the reasons why price elasticity of demand + income elasticity of demand are important

amongst major supermarkets competing against Aldi and Lidl. (10)

Price elasticity of demand is a measurement of the change in the consumption of a product in

relation to a change in its price eg if the price of a product becomes cheaper, more consumption of
the product. This can be calculated using the formula: percentage change in quantity demanded
divided by percentage change in price. Income elasticity of demand is the sensitivity of the quantity
demanded for a certain good to a change in the real income of consumers who buy this good. Eg if
income increases less people buy inferior goods and demand for luxury goods increases. This can be
calculated using the formula: percentage change in quantity demanded divided by percentage
change in income.

Price elasticity of demand is important amongst major supermarkets competing against Aldi and Lidl,
as consumers who cannot afford to buy luxury goods, will tend to buy the cheapest substitutes in
the market and for other major supermarkets such as Asda and Tesco, they must be able to price
match price with Aldi and Lidl as a minimum or have lower prices in order to maximize revenue and
attract more consumers towards their shop. For example in the extract Petra says Asda’s own label
closed cup mushrooms went up by 21.4% meaning that as a consumer she cannot afford to buy
Asda’s supermarket own brand regularly, therefore reducing the revenue for Asda themselves and,
as a result she would try an alternative supermarket such as lidl, which may have a cheaper
alternative. This proves Asda as a major supermarket should lower its own brand prices more in
order to generate more revenue.This is a compelling reason to demonstrate the importance of
pricing in supermarkets, that are competing against lidl and Aldi, as if prices of major supermarkets
are too high consumers will switch to Aldi and lidl as a substitute shop. By keeping prices lower in
major supermarkets it maximizes the firms revenue due to its focus on penetration pricing, so keeps
the supermarket own branded products prices low but the quantity being sold is high, therefore
resulting in higher profit for the firm.

Furthermore, price elasticity of demand is important amongst major supermarkets competing

against Aldi and Lidl as the quality of the food must be higher than Aldi and lidl by a major
supermarket such as Asda, with the same price of the product as lidl and Aldi or lower in order to
attract consumers and encourage them to do weekly shops in that major supermarket instead, in
order to maximize revenue. This is the most important reason that determines the significance of
price elasticity of demand amongst supermarkets that compete against lidl and Aldi as if the product
is more cheaper then lidl by a small amount but the quality of the food is very poor for example lack
of health benefits or contaminated fruit and veg then most of the consumers will tend to buy the lidl
version due to lack of utility as consumers from the major supermarket, as the lidl alternative is still
affordable and majority of the products maintain a quality that maximizes the utility of the consumer
at the same time.

In addition, price elasticity of demand is important amongst the major supermarkets as they must
provide the same amount of availability of stock at a cheaper or matched price as lidl and Aldi, or
more in order to maximize revenue as if more consumers are gained through cheaper prices or
advertising, and if inferior goods or other products are limited and run out, this pushes consumers
away from that supermarket due to unavailability of the products they want and more towards Aldi
and lidl, where the stock is regularly present. In the extract, it mentions “the availability of some
value ranges had been more limited then previously” resembling the importance of constant supply
for the consumers. This is a very persuasive reason as to why price elasticity of demand is important
amongst major supermarkets as the manufacturers are providing more stock, which is sold at
cheaper price to consumers that is good quality, and by providing sufficient stock of the products,
more consumers are able to buy it repeatedly and maximize their utility, as well as maximizing the
revenue for the firm, and creating a reputation that the supermarket will have all the essentials
required when they visit, building customer loyalty as they trust that the supermarket has all they
need in stock at reasonable prices and do not need to travel elsewhere to search for products that
are affordable and available.

Income elasticity of demand is important amongst major supermarkets such as Sainsbury’s

competing against Aldi and Lidl, as if income decreases due to inflation or economic recession then
less consumers can afford luxury goods, as well as expensive inferior goods. Therefore, major
supermarkets should try to lower prices on inferior goods than lidl and Aldi in order to maximize
revenue and provide for the high demand. This is a plausible reason as consumers cannot afford to
buy expensive products and still require basic necessities in order to cook. In addition, by creating
products that are cheaper then Aldi and Lidl, more consumers are attracted towards regularly
shopping at another major supermarket which, increases the supermarkets’ revenue. For example in
the extract Petra states “ I had to cut down on my meat intake… they are like luxuries now”
demonstrating the importance of lower prices in supermarkets in order to supply for those
struggling with bills.

Moreover, income elasticity of demand is very important amongst major super markets competing
against Aldi and Lidl as if income is lowered, major supermarkets have the opportunity to create a
branch of social supermarket within itself for example Asda social supermarket, which would be a
shop containing discounted food sold to people on a lower income that struggle to afford products
from the major supermarkets. This would be one of the most compelling reason as to why income
elasticity of demand is important amongst supermarkets competing against Aldi and lidl as it
focusses on the same consumer market and provides branded foods for cheaper unlike Aldi and lidl,
which contain majority own brands or similar alternatives to the higher quality foods.

In addition, income elasticity of demand is very important amongst major supermarkets competing
against Aldi and lidl as if there is a decrease in income due to an economic crisis or inflation, the food
manufactures that supply for the supermarket would increase the supply of inferior goods and try to
reduce the costs of the factors of production immediately in order to maximize the profit margin and
create cheaper products that maximize consumers utility in the time of high demand whilst
decreasing the resources use for luxury goods supply in order to support the high demand. This is a
very persuasive reason as more people would rely the inferior goods and require these products due
to earning less money and by reducing factor of production costs, the major supermarket would still
maximize their revenue and the consumers would still maximize their utility.

Furthermore, as mentioned in the extract “premium ranges went up by 3.2” due to inflation,
therefore if consumers get real income – adjusted income rates due to inflation, which boosts
income. It would increase competition between lidl and Aldi and more high end major supermarkets
such as waitrose and Marks and Spencer’s that provide products that are more premium. This is a
less convincing reason as, lidl and Aldi’s premium deluxe ranges are often still cheaper then the
brands and own branded products from marks and Spencer’s and waitrose. However, the quality
from marks and Spencer’s and waitrose is often much higher then Aldi and lidl as the taste and
packaging is of a better standard according to most consumers, therefore majority consumers would
prefer to shop at M and S or waitrose if they can afford it.