1. Existing products pose a particular challenge to their vendors. If too much change is put on an existing product, customers may switch to competing products. On the other hand, if a product does not keep up with its competitors, or stay on the cutting edge of technology (where appropriate), vendors will find that they lose market share.
To combat this, companies undertake demand analysis to determine what not only the preferences that their consumers have for products and possible product changes, but also to determine the lifecycle stage that the product is in. The demand analysis focuses on determining the demand schedule for the product, in which the elasticity of demand is of particular importance. If a product has a particularly high elasticity of demand, small changes in price result in large changes in quantity. If the change being considered by a company will involve an increase in the price of the good and the good is highly elastic, the company may lose market share. This is the case when goods are considered commodities and product enhancements do little to change the public's perception.
If, however, the good has a highly inelastic demand schedule, the company may want to go ahead with product enhancements that are designed to take advantage of that inelasticity and which offer the potential to maintain market share in the face of possible increased competition by companies willing to make similar investments.
2. Consumer optimization suggests that each consumer has an indifference curve with respect to two particular goods, meaning that the consumer is indifferent as to certain combinations of the goods he receives. If, for example, we consider food and clothing, the consumer might be as content with two units of food and six units of clothing as with five units of food and one unit of clothing. Consumers also have budget curves reflecting the reality of their income position. Given the same two commod...