Final answer:
A cumulative quantity discount increases as the quantity of products purchased increases, incentivizing buyers to buy more as the price reduces with volume. This is common in business to encourage bulk buying and can influence demand elasticity.
Step-by-step explanation:
Typically, with a cumulative quantity discount, the discount increases as the quantity of products purchased increases. This type of discount strategy is used by businesses to encourage buyers to purchase in larger quantities by providing graduated reductions in price as the quantity of the order expands.
A cumulative quantity discount is based on the total volume of goods a buyer purchases over a specified period. For example, a supplier might offer a 5% discount when a customer purchases 100 units, a 10% discount at 200 units, and a 15% discount at 300 units. As the buyer purchases more, they reap greater savings, making it beneficial for them to buy in bulk.
In economic terms, the concept of increasing discounts correlating with larger quantity purchases is reflective of the demand curve behavior outlined in Figure 3.7. An income increase can shift demand to the right, indicating a greater quantity demanded at every price level. Moreover, as production costs tend to rise with greater output — since more inputs are needed which incur additional costs — businesses aim to incentivize higher purchase volumes to help offset these costs and maintain efficient inventory levels. However, such discounts also affect the elasticity of demand for products. If a product is elastic, a slight increase in price could lead to a significant decrease in quantity demanded; therefore, offering cumulative quantity discounts can be an effective strategy to maintain volume sales in a competitive market.