South-Western College Publishing - Economics  
Happy Holidays for Retailers
Subject Output, Income, and Cross-Price Elasticity
Topic Elasticity
Key Words Output, Income, and Cross-Price Elasticity
News Story

Retailers had one of their best holiday seasons of the decade. Sales were up 6.1 percent on average, the biggest gain since 1992. This was due to the strong economy and the soaring stock market in late 1999. The new millennium also appeared to trigger sales. While on-line sales boomed, traditional shopping, such as at malls, was responsible for 90 percent of sales.

The sales increases were uneven, however. High-end retailers, such as Tiffany, Zales, and Neiman Marcus saw double-digit increases. Moderate-price department stores, selling home goods and seasonal apparel, fared less well. J.C. Penney's sales rose only 0.5 percent, and Sears' sales fell 0.6 percent. This is in spite of coupons and discounts for using store credit cards. Specialty retailers, such as American Eagle Outfitters, which identified trends and marketed their products well, performed better. Discount chains also saw big gains in revenues due to discounted prices and improved product quality.

(Updated February 1, 1999)

1. As the economy was strong in 1999, consumer incomes were higher, leading to greater demand for products.
  a) What is the income elasticity of demand? How is it calculated?
  b) What was the sign of the income elasticity of demand during the holiday season in 1999? Explain your answer.
  c) Given your answer to (b), in economic terms what kinds of goods are being sold?
2. Online shopping tends to be cheaper than mall shopping, both in terms of the price of the product and the expenditure of time and effort.
  a) The holiday season saw booming sales online at the expense of some traditional shopping. Given that the price of online shopping decreased while the demand for similar products in stores declined, everything else being equal, what was the sign of the cross-price elasticity of demand for online and traditional store products?
  b) What does this imply about the nature of the two types of products?
3. a) Discount stores experienced an increase in revenue as their prices were reduced. Is the price elasticity of demand for their products elastic or inelastic? Explain your answer.
  b) Sears saw revenues fall in spite of discounts. Is the price elasticity of demand for their products elastic or inelastic? Explain.
Source Lorrie Grant, "Retailers ring up one of best holiday seasons," USA Today, January 7, 2000.

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