Price Elasticity and the Factors that Affect it
At the heart of marketing, there is the ability to predict how consumers will respond to various forms of incentives. While companies can never be 100% sure how a consumer will behave, the goal of every marketing team is to increase conversions.
To understand how the supply and demand for a product change when its price changes, economists use price elasticity.
Elasticity is a term widely used in economics and refers to a measure of the sensitivity of one of the parameters (for example, supply or demand) to a change in another (for example, price, income), showing how much the first indicator will change when the second one changes by 1%.
What is price elasticity?
Price elasticity shows how the demand for certain goods or services depends on price changes. If we change the price a little, will that change have a dramatic effect on the demand for the product or only a minor effect? Price elasticity is a measure of the market's response to price changes.
The price elasticity of a product usually depends on whether alternative products are available, and if so, how much. If consumers can easily substitute a product for another, cheaper option, the price elasticity of demand is very high. However, if the product is vital and cannot be easily replaced, the price elasticity will be low.
For example, raising the price of a product usually results in a decrease in demand because consumers no longer want or can no longer afford to spend more. Conversely, a decrease in the price of a product usually leads to an increase in demand.
This is known as price elastic demand because demand is highly dependent on pricing and will fluctuate in response to price changes.
However, not all products and services follow this pattern. Essential goods, such as food, housing and medicines, must be bought regardless of the price. This means that demand remains stable even when prices change. This is an example of price inelastic demand.
Factors affecting price elasticity.
The price elasticity of demand depends on several different factors, including:
- Availability of substitutes. Can the consumer purchase an alternative product at a lower price?
- Degree of need. How necessary is the product? Can the consumer do without it?
- Brand loyalty. How loyal are consumers to a particular brand?
- Period: Demand is inelastic in the short run but elastic in the long run.
- Variety of uses: Goods that can be used for different purposes have elastic demand. On the other hand, if a product has few uses, the demand for it is likely to be less elastic.
- Consumer habit: Goods that consumers are accustomed to will have inelastic demand.
How to use price elasticity in business?
Price elasticity finds application in a variety of areas. The success of a company largely depends on the elasticity of its products. Competition becomes fierce when there are products on the market with similar elasticity.
The price elasticity of demand for a particular product or service is of great importance to businesses. It affects the ability to raise the price of the product. Elasticity is important for pricing decisions because it helps us understand whether raising or lowering prices will achieve our pricing goals. For example, if you know that your product is inelastic, you can forecast sales and revenue ahead of time, as well as take into account the planned price change.
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