Q1. Imagine you own a coffee shop in a busy downtown area.

You're considering offering

free WiFi to attract more customers. Analyze the potential economic impacts of this
decision on your coffee shop's demand. Use a relevant diagram to illustrate the impact of
your decision on the coffee shop’s sales and prices. (7 Marks/CLO2/PLO2)

Examining the Economic Influence of Complimentary WiFi in my Café

Providing free WiFi can significantly affect my café’s demand, influencing sales and pricing
dynamics. Let's assess potential outcomes using a straightforward representation:

Initial Configuration:

• Demand Curve (D1): This curve symbolizes the initial demand for your café's
offerings at prevailing prices without free WiFi.
• Price (P1): This point denotes the current price of your coffee and other items.
• Equilibrium Point (Q1): This point illustrates the current quantity of products sold
at the existing price, setting the initial baseline scenario.

Impact of Free WiFi:

• Rise in Demand: The provision of free WiFi acts as a non-price allure, shifting the
demand curve rightward (D2). This attracts potential customers who previously
may have refrained from visiting due to the absence of WiFi, broadening my market
reach.
• New Customer Groups: The shifted demand curve (D2) encompasses fresh customer
segments like remote workers, students, and digital nomads who highly value the
convenience and productivity boost from free WiFi.
• Potential Price Adjustment: With heightened demand (D2), there's a chance to
increase prices (P2) without losing customers. The new equilibrium point (Q2)
demonstrates a higher quantity sold at a potentially higher price, resulting in
increased revenue.

However, consider these countervailing aspects:

• WiFi Provision Costs: Account for the expenses related to establishing and
maintaining WiFi infrastructure. If increased revenue doesn’t compensate for these
costs, overall profitability might decrease.
• Customer Mix Alteration: New customer segments attracted by free WiFi might be
more sensitive to prices than my existing clientele. This could limit potential price
hikes to avoid alienating loyal customers.
• Ambiance Impact: An influx of customers due to free WiFi might compromise the
relaxed atmosphere and seating availability, potentially reducing the allure for other
patrons.

In Summary:
Providing complimentary WiFi can strategically lure new customers, enhance demand, and
potentially allow for price adjustments. Yet, it's vital to meticulously assess costs, potential
shifts in customer demographics, and the impact on ambiance before implementation. A
well-considered approach considering all these factors will aid in making an informed
decision for my café's prosperity.

Q2 Consider you are a consultant for a company that manufactures

electric vehicles (EVs). The company is keen to understand the income
elasticity of demand for its vehicles. Based on your understanding,
explain: a. How income elasticity of demand is assessed conceptually. b.
If you discover the income elasticity of demand for EVs is 1.5, what
would be your recommendation to the company in anticipation of an
upcoming economic boom? (7 Marks/CLO2/PLO2)

Assessing Income Elasticity of Demand for EVs

A. Understanding How Income Impacts EV Demand:

Income elasticity of demand (IED) reveals how consumer purchasing patterns for EVs
adjust with changes in their income. In simpler terms, it tells us how much more (or less)
likely people are to buy an EV as their income increases or decreases.

To conceptualize IED, think of it as a ratio:

IED = % Change in EV Purchases / % Change in Income

Based on this ratio, IED falls into three categories:

• Elastic (IED > 1): Demand for EVs grows considerably faster than income. Higher
incomes significantly boost EV purchases.
• Unit Elastic (IED = 1): Demand for EVs increases alongside income at the same rate. A
10% income increase leads to a 10% increase in EV purchases.
• Inelastic (IED < 1): Demand for EVs rises slower than income. Higher incomes have a
limited impact on EV purchases.

B. Capitalizing on an Economic Boom with EVs:

If the IED for EVs in your client's target market is 1.5 (elastic), prepare for a significant
demand surge during an economic boom. This presents a fantastic opportunity, but also
demands strategic preparation:

Recommendations:

• Gear Up for Growth: Anticipate the demand spike and invest in expanding production
capacity to avoid stockouts and meet customer needs.
• Target the Right Audience: Focus your marketing efforts on segments that will benefit
most from the boom, like high-income individuals or environmentally conscious
consumers.
• Make EVs Accessible: Position your EVs as desirable yet attainable through financing
options or highlighting cost-saving benefits like lower fuel costs.
• Fuel Innovation: Continue developing advanced technologies and features to solidify
your competitive edge and cater to evolving preferences during the boom.
• Build a Lasting Brand: Prioritize quality, sustainability, and customer service to foster
long-term brand loyalty and reputation even after the boom subsides.

Further Considerations:

• Boom Characteristics: The nature of the boom (general vs. sector-specific) will influence
which consumer segments experience the greatest income increase and potential EV
demand surge.
• Competitive Landscape: Monitor competitor strategies and consider unique
differentiation or collaboration opportunities to stand out.
• Post-Boom Sustainability: Develop strategies to retain customers beyond the boom
period by focusing on long-term value, community engagement, and brand loyalty.

By actively anticipating and strategically preparing for increased demand during an

economic boom, your client can leverage the income elasticity of EVs to achieve
significant growth and market share gains.