Elasticity

  • Uncategorized

Price

Theconcept of elasticity refers to the measure of how the demand forproducts responds to changes in their respective prices. It is aconcept that is applied in the study of economics and by companieswhen setting prices for their products. A high elasticity means thatthe target consumers of a given product are very sensitive to minorchanges in the variables (such as the price) being considered (Gallo,2015). There are four major determinants of price elasticity,including the necessity of a given product, proportion of income inthe total cost, frequency of purchase, and the number of availablesubstitutes.

TheFormula Used To Compute the Price

Theformula for this elasticity has two major components, including thepercentage change that occur in the quantity that is demanded and theprice of a given product (Nitisha, 2016). This formula is expressedas follows

Priceelasticity of demand = change in quantity that is demanded (%) /change in the price (%)

Thechange in demand = [New quantity that is demanded – old quantity thatis demanded] / old quantity that is demanded

Changein the price = [New price – old price] / old price

How and Marketing work together

is among the key concepts that are commonly applied in the field ofmarketing. The roles of marketing include the conversion, brandbuilding, and usage. The knowledge of elasticity informs the processof establishing the pricing strategies. Marketers advise theircompanies about the most appropriate pricing strategies in order toensure that any change will not reduce the level of firm’sefficiency in the conversion of a product into cash (Guo, 2012). Inaddition, marketing helps the organization retain its conversioncapacity by matching the change in price with effective communicationabout the value of the product. Consequently, effective marketingstrategies minimize the level of elasticity by helping customerslearn about other factors (such as quality) that can reduce theirfocus on changes in price.

Thelevel of elasticity of a product can affect the job of a marketingmanager positively and negatively. The nature of the effect dependson the ability of the marketing manager to assess the extent of thesensitivity of the product to its price in the market. Marketingmanagers who are more effective in determining the sensitivity of theprice have a better chance to succeed in their career (Guo, 2012).However, the high sensitivity of products to prices can affect themanagers’ job by reducing their ability to convert brands intocash.

Zonesof

is divided into five major zones. The first zone is known as perfectelasticity. This type of elasticity occurs when a slight change inthe price leads to a large decrease or increase in demand for a givenproduct (Gallo, 2015). The concept is applied in business todetermine the need to differentiate the products, instead of engagingin price wars.

Secondly,relatively elastic products undergo a large change in demandfollowing a slight adjustment in price. However, the change isrelatively smaller compared to perfectly elastic brands (Gallo,2015). This type of elasticity informs the pricing decisions since aslight decrease in price can result in a significant increase insales.

Third,unit elasticity occurs when the change in the price of a givenproduct matches the quantity demanded. This type of elasticity isused to set prices that will counter the effect of substitution. Forexample, a business can use this elasticity to counter thesubstitution of beef for pork (Gallo, 2015).

Relativeinelasticity occurs when a slight change in demand takes placefollowing a large adjustment in price (Gallo, 2015). Businesses canuse the information about this type of elasticity to select the bestinvestment projects and brands. They are likely to earn more fromprojects that are relatively inelastic.

Perfectinelasticity takes place when the quantity that is demanded is notaffected by adjustments in the price (Gallo, 2015). Businesses useinformation about this type of elasticity to maximize their revenue,since their market share is not affected by an increase in the price.

Conclusion

Priceelasticity is a significant economic concept that has numerousapplications in the real business world. In most cases, the conceptis used to set prices that will not reduce the market share of thecompany.

References

Gallo,A. (2015, August 21). A refresher on price elasticity. HarvardBusiness Review.Retrieved October 9, 2016, fromhttps://hbr.org/2015/08/a-refresher-on-price-elasticity

Guo,V. (2012). Price elasticity 101: The necessities and your pricingstrategy. PriceIntelligently.Retrieved October 9, 2016, fromhttp://www.priceintelligently.com/blog/bid/154374/Price–101-The-Necessities-and-Your-Pricing-Strategy

Nitisha,A. (2016). Five types of price elasticity of demand: Explained.EconomicsDiscussion.Retrieved October 9, 2016, fromhttp://www.economicsdiscussion.net/elasticity-of-demand/5-types-of-price-elasticity-of-demand-explained/3509

Close Menu