Based on the required profitability and desired market share, the specific pricing for a product or service is then decided. Marketing research can be conducted using various price points to identify corresponding demands for a product or service. An inelastic demand often allows for a more varied mix of pricing, including promotional pricing and discounting. Price elasticity is a major factor in determining the pricing of a company’s products or services. if the price of such product increased by say 30% then the sales will drop by 30% or in other words there will be 30% decrease in demand. Wine and some other spirits, clothes typically have unit elastic demand i.e. Product Pricing, By using the concept of price elasticity of demand, the business firms can determine whether a decline in price is better or a rise in price. Thus the PED coefficient for a product or service with unitary elasticity is exactly one. Unit Elastic Demand - A product or service is said to have unit elastic demand if the percent change in price is directly proportional to percent change in quantity demanded. normally show inelastic demand as these class of products are required on a day to day basis and they do not have appropriate alternatives as most these products are provided through government regulated industries. Necessity products such as milks, toothpaste, fuel, water etc. Syllabus: Examine the role of PED for firms in making decisions regarding price changes and their effect on total revenue. Hence, demand for a product or service is said to be inelastic if the PED coefficient has an absolute value of less than one. In other words a greater change in price leads to a smaller change in quantity demanded. Inelastic Demand – A product or service is said to have inelastic demand if a change is price does not significantly impact the change in demand. Presence of substitutes or competitive products increases the elasticity of demand as consumers have alternative options if a company increases the price of its product. Consumer goods normally show elastic demand as customers either postpone their purchasing decisions or reduce the quantity purchased (e.g., television, computers etc.). Hence, demand for a product or service is said to be elastic if the PED coefficient has an absolute value of greater than one. In other words a small change in price leads to a greater change in quantity demanded. Depending on the absolute value of the PED or degree of elasticity, the demand for a product is classified as “Elastic”, “Inelastic” or “Unit Elastic”.Įlastic Demand – A product or service is said to have elastic demand if a change is price significantly impact the change in demand. a positive number although it is technically a negative quantity. But for convenience, economists use the absolute value i.e. Since for most of the products, increase in price leads to decrease in demand, PED is almost always negative. PED = (% change in quantity demanded)/ (% change in product pricing) Mathematically PED is calculated as follows: Companies use past sales data, competitor data, and primary market research to analyze the price sensitivity of customers in their target market segments. This is a very important aspect of marketing as it gives a quantitative measurement of the responsiveness of consumers to fluctuations in pricing. Price Elasticity of Demand (PED) is a measure of change in quantity demanded with respect to change in price of the product under consideration when other factors of demand like price of other goods, income and taste kept constant. Search Engine Optimization Professional.When a good or service is inelastic, sellers and buyers are not as likely to adjust their demand for a good or service when the price changes. When the price of a good or service reaches the point of elasticity, sellers and buyers quickly adjust their demand for that good or service. Products or services that are elastic are either unnecessary or can be easily replaced with a substitute.Ĭompanies that operate in fiercely competitive industries provide goods or services that are elastic because these companies tend to be price-takers or those that must accept prevailing prices.Elasticity is an important economic measure, particularly for sellers of goods or services, because the reflects how much of a good or service buyers will consume when the price increases or decreases.When the price of a good or service has reached the point of elasticity, sellers and buyers quickly adjust their demand for that good or service.Companies that operate in highly competitive industries offer products and services that are elastic, as the companies tend to be price-takers.
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