NMJ Gas and Plumbing Services (Price and income elasticity of demand)
Specification topic: Price and Income Elasticity of Demand
Case Study: NMJ Gas and Plumbing Services
Nathan Jones left school determined to learn a practical skill which would give him a good standard
of living. After embarking on a course in plumbing, Nathan was taken on by a large plumbing and
gas company in Oldham, where he did exceptionally well and became a fully qualified Gas Safe
engineer. Sadly, after a few years, the company went into liquidation and this prompted him to
consider self -employment.
28 year old Nathan had proven practical skills, and based on his experience with the plumbing and
gas company over several years, he was confident that despite some local competition, there was
sufficient demand for reliable installation and maintenance services. However, he was unsure how
to proceed with setting up his own business. He sought help from a family friend who ran a
business as a plumber, and spoke to Julia, the Small Business Adviser at his bank.
Julia recommended Nathan offered a 24 hour emergency call out service (e.g. to someone who as
an urgent problem such as a leak or no heating) as well as standard maintenance and installation
services which could be booked in advance. Nathan set up as NMJ Gas and Plumbing Services and
decided to take Julia’s advice offering emergency callouts as well as a full pre-booked Maintenance
and installation services. He also decided to offer kitchen design services to customers considering
installing a new kitchen.
Julia estimated the price and income elasticity of demand figures for the three services Nathan
offered.
Price Elasticity of Demand
Income Elasticity of Demand
Emergency call out
-0.4
-0.1
Maintenance and installation
services (booked in advance)
-1.3
+0.8
Kitchen design service
-2.4
+3.5
Four years later, NMJ Gas and Plumbing Services is a profitable business with many loyal
customers.
Exam-style questions
1. Assess whether Nathan should raise his prices, to maximise his revenue. (10 marks)
2. Evaluate the likely impact on Nathan’s finances of a fall in customer income. (20 marks)
© Tutor2u Limited 2015
www.tutor2u.net
NMJ Gas and Plumbing Services (Price and income elasticity of demand)
1. Assess whether Nathan should raise his prices, to maximise his revenue. (10 marks)



Raising prices of the emergency call out fee is likely to raise revenue as demand for this is price
inelastic (probably because it is a necessity so customers are less responsive to price changes)
He has loyal customers who are likely to stay using his services even if prices rise
Raising prices would reduce revenue in the services he offers which have price elastic demand
(maintenance and installation and kitchen design)
Potential counterbalance



The suggestions above depend on the reliability of these price elasticity of demand estimates
e.g. is Julia an expert in this industry? What market research were these estimates based on?
The estimates are out of date – things may have changed since they were calculated e.g.
demand could easily have become more price inelastic since he gains a reputation and loyal
customers or more price elastic if there are growing numbers of plumbers in the area.
The PED values may change depending on the time of year e.g. not having heating is less of an
emergency in August
Nathan would need to consider a range of factors before making pricing decisions such as
competitors’ prices and his costs.
2. Evaluate the likely impact on Nathan’s finances of a fall in customer income. (20 marks)



A fall in customer income is likely to improve revenue from emergency call outs very slightly
(estimated to be an income inelastic inferior good) perhaps because customers cannot afford
to update appliances and boilers so they break down more regularly
Financially Nathan would face a large decline in demand for his kitchen design service as if
customers are poorer they will not be buying new kitchens. For every 1% decrease in customer
income, demand for his kitchen design service will fall by 3.5%
Demand for maintenance and installation services is income inelastic but is still a normal good
so revenue from this service is likely to fall but not as much as greatly as the kitchen design
services.
Potential counterbalance



The impact on Nathan’s finances depends on which service he spends most of his time. If most
of his business is emergency callouts, revenue might slightly improve.
The impact depends on the reliability of the income elasticity of demand figures – how did Julia
calculate these? They are out of date so the figures could have changed. The emergency callout
figure puts this as “only just” inferior. A slight error in calculation and the good could be a
normal good with income inelastic demand. In this case all products would worsen in the face
of falling consumer income
The impact depends on the size of the fall in consumer income. There would need to be a
reasonable fall in income before maintenance and installation services are overly affected
© Tutor2u Limited 2015
www.tutor2u.net