10/07/2005

Elasticity

I came across an article in Business Week talking about the sales forecasts of the upcoming holiday season for retailers. Due to hurricane Katrina, loss of jobs has led to a decrease in income for many people. The increase in gasoline and heating oil prices also exacerbate the situation, leaving less income to spend in retail stores. In light of our recent discussion on elasticity of demand, I found this article highly interesting. Not surprisingly, while many retailers saw a drop in same-store sales this September, Wal-Mart managed to show a 3.8 per cent increase in sales. Costco also saw an increase in sales. This is to be expected, since a drop in income would lead people to shop for cheaper things. Another thing I found interesting was the drop in sales from high-end retailers such as Ann Taylor and Talbots, since we've been talking about how a brand name tends to decrease elasticity. However, teens seem to be loyal to their brands. Abercrombie and Fitch and American Eagle seem to have a relatively inelastic demand, as increased same-store sales exceeded their September estimates.

2 comments:

Logan said...

I like your blog Ann. I think that you have a good grasp on what elasticity means, when income drops people resort to shopping in cheaper stores. But there is something else to consider, Costco is a bulk retailer who sells large quantities of food and other items at a discounted price. Do you think that Costco's sales have increased because in the wake of many natural disasters, people have begun to feel a need to stock-up on the essentials for survival?

Dr. Tufte said...

I think this is a pretty solid application of elasticity, Ann.

One thought to add is that Wal-Mart and Costco are the brand, rather than the different brands they sell inside. People went to these places because they had a brand image of affordability.

Part of the reason that retailers focus on teenagers and young adults is precisely because they have more inelastic demands.