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The price elasticity of demand for food, which is the industry where All America grocery Inc operates, is 0.2. Per McEachern (2015), as the value is between 0 and 1, the product is on the inelastic part of the demand curve. As such, if prices increase, demand is not likely to change substantially, as customers require food to live. Moreover, McEachern (2015) defines the price elasticity of demand as the absolute value of “the percentage change in quantity demanded divided by the percentage change in price” (p. 94). With a 10% increase in cost that leads to a 10% increase in price, the quantity demanded will change by a value equivalent to the product of the two other values. As such, it is equivalent to 0.2 * 0.1 = 0.02, or 2%, which will be the decrease in demand.
With the rising expenses of different aspects of operations, both All America Grocery Inc and the customers will have to pay the cost of these increases. However, the low price elasticity of demand suggests that the latter will have to pay for a higher fraction of the costs than the latter. As Pride and Ferrell (2016) note, with low price elasticity, the customers cannot wait until the prices decrease to purchase the product. Competing businesses will take the same measures, and prices will increase across the industry. Those that refuse to do so will bear the increased costs and likely fail. Therefore, prices will increase across the industry, as doing so will be necessary for companies to stay competitive and survive in the long term. As such, the company can safely raise its rates to pass the costs on to the customers.
References
McEachern, W. A. (2015). Microeconomics: A contemporary introduction (11th ed.). Boston, MA: Cengage Learning.
Pride, W. M., & Ferrell, O. C. (2016). Foundations of marketing (7th ed.). Boston, MA: Cengage Learning.
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