Price Elasticity
When a price of a product is
changed, depending of some factors, it will have different influences on the
supply and demand. The elasticity of a product
is determined by the gradient of the supply demand graph or through the formula
of:
Price
Elasticity= % change in demand / % change in price
When the price elasticity is more
than 1, the product is price elastic. The demand of the product increases along
with the change of price. When there is a increase of price, there will be a large effect of the quality demand of the product. For instance, the fall of 15% in price increases 30%
of demand. Therefore, the price elasticity is 2.
When the price elasticity is less
than 1, the product is price inelastic. The demand of the product decreases
along with the change of price. When an increase of price is made, the effect of quality demand is small. For instance, the increase of 20% in price
causes a 5% fall in demand. Hence, the price elasticity is 0.25
Rare cases of price elasticity are
when it equals to 0, stating that the product is perfectly inelastic. There
will be no changes in demand when the price is altered. A perfect inelastic product sounds impossible
however, it can happen. Examples of such products are habit forming drugs,
where they are still needed in life no matter the price.
Factors that affect price elasticity
of a product are:
Competition
Price elasticity depends on the number of competitors in the field. If
the price is increased, this will cause the customers to prefer the products of
the same kind made by other companies with a lower price, lowering the demands
of the current company.
Necessity
If the product is necessary for the customer and there are no other substitutions
for the products, the customer will be forced to purchase the product no matter
what the price is.
Loyalism
Loyal customers will continue purchasing the company’s product even
after changes of price are made.
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