Why is the concept of price elasticity of demand of importance to the firm?


Top Answer
User Avatar
Wiki User
2009-03-27 10:02:35
2009-03-27 10:02:35

The concept of Price Elasticity of Demand helps companies maximise their profit and decide whether a particular market can be profitable.

If a company's product has a high elasticity of demand, the more the price goes up, the fewer consumers will buy.

Sometimes, the relationship of price and demand is complicated:

* If consumers (and this includes businesses) feel they can't afford a price rise, they will try to economise. * ** They will cut out unnecessary journeys, they will turn down the heating in their home. This is "Income Price Elasticity of Demand". ** They may try to find an alternative product to oil. That may be using public transport or a bicycle instead of cars, telecommuting or teleconferencing instead of travelling. In the longer term, it could involve buying an electric car or fitting solar panels to their house. This is "Cross Price Elasticity of Demand".

* If consumers don't feel they have any alternative, they will use the same amount of oil whatever happens to the price Plastics manufacturers can't make plastic without oil (at least with today's technology), bus companies can't run their buses (in the short term) without oil. So for them, there is "price inelasticity of demand. You've seen that there is a difference between short an long term. If consumers (or whole industries or governments) invest in different technologies, that particular demand for oil will reduce for a long time or for ever.

So, how does it affect companies?

* Consumers in the highlands of Scotland probably have few public transport alternatives, may have to travel further to work and shops, probably have less choice of petrol station; and the price will be less elastic; and that's one of the reasons petrol prices are much higher than in big cities where there are more options. But suppose a petrol station hikes its prices too much: people may feel they can't afford to live there any more and move; or another petrol station may open; or a community bus service may be started; and the vendor may suffer in the long term.

* Hotels will charge more during school holidays because the fixed holidays together with limited supply of holiday accommodation, flights, etc. make the prices inelasitic. * Transport companies may alter their fares according to the price elasticity for different consumer groups. For example, they may have higher walk-on fares because consumers who arrive at a ferry terminal, airport or train station probably have a high need and few alternatives; they may have higher fares on commuter routes in mornings and evenings because commuters are less price-elastic than tourists who may decide to take bus or stay at home rather than pay a high fare. * If a company finds input costs are volotile in a price elastic marketplace, they may decide not to invest in a project, to move or close their business, or alter their product range. For example, Japan's Kansai region consumers are much more "price elastic" to tuna sashimi than Tokyo region consumers; so shops will not stock the best quality tuna sashimi in Osaka because consumers will choose a cheaper alternative instead. There are certain products that are "inverse price elastic" - where consumers are more likely to buy if the price is high (perhaps because it gives them a safe feeling about quality or because they want to impress their friends with the price of the product. A decorator may get less business charging half price in a market where consumers feel a more expensive decorator would do a better job.

Following from this, companies may also find they have to use price elasticity realities for marketing reasons. Comapnies who exploit this situation will probably have regular and massive sales. For example, shops selling trainers (sneekers) now realise that the market is inverse-elastic unless consumers are happy they are buying a quality product, but will buy at the lowest possible price if they feel it's discounted.

Companies may try to make manufacture inverse price elasticity (for example, by brand-builling): in some markets, people will pay more for a brand which makes them feel safe or confident.


Related Questions

what are the importants of price elasticity of demand to a cellphone dealer

The degree of responsiveness of change in demand as a result of change in its price is known as elasticity of demand. I mathematical language we can say that; Elasticity of demand = %age change in Quantity Demanded DIVIDED BY %age change in the Price.

there are broadly classified into five types 1. Perfect price elasticity of demand 2. Perfect price in-elasticity of demand 3. Relative price elasticity of demand 4. Relative price in-elasticity of demand 5. Unity price elasticity of demand

Three of the factors on elasticity of demand are necessity vs. luxury, availability of substitutes, and relative importance.

Price elasticity of demand is a way to determine marginal revenue. Optimal revenue and, more importantly, optimal profit will occur to the point when marginal revenue = marginal cost, or the price elasticity of demand < 1.

distinguish between price elasticity of demand and income elasticity of demand

1)price elasticity of demand 2)income elasticity of demand 3)cross elasticity of demand

Cross elasticity of demand is the responsiveness of demand for one product to a change in the price of another product. It will help predicts how prices of products will act.

Unitary elasticity is when the price elasticity of demand is exactly equal to one.

Elasticity of demand is the degree of change in demand of a product according to the changes in determinants of demand such as income, price, taste&preferences of the consumer; while price elasticity is the degree of change in demand according to the change in price of the commodity alone.

Cross price elasticity of demand measures the responsivenss of demand for a product to a change in the price of another good.

In economics , the cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demand of a good to a change in the price of another good.

role of price elasticity of demand in managerial decisions

The price elasticity refers to the change in demand due to the change in price. The income elasticity of demand on the other hand refers to the change in demand due to the change in income.

Price elasticity of demand is important because it determines how much the price of a product can change before the demand fluctuates. If a product is inelastic, that means that a change in price of the product will likely not affect the consumer's demand of the product drastically. But if the product were elastic, a small price change may drastically affect consumer demand.

The elasticity of demand is a measure used in economics to show the responsiveness of the quantity demanded of a good or service. The degree of price elasticity, on the other hand, is the variation in demand that is not uniform with a change in price.

Price elasticity of demand is positively correlated with the existence of substitute goods.

The conclusion of the price of elasticity of demand is the effect of price change based on the revenue it receives. It is based off the demand of the product and the price of the product.

explain why the price elasticity of demand varies along a demand curve, even if the demand curve is linear.

Elasticity of demand measures how consumers react to a change in price, while elasticity of supply measures how firms will react to change in price

Price elasticity of demand means how much the demand of an item changes in relationship to its price. Most items which are considered necessity items either have low price elasticity or none at all.

price elasticity is the degree of responsiveness of demand or supply to a small change in price.

The two extreme ranges of price elasticity of demand are Zero and Infinity.

Copyright ยฉ 2020 Multiply Media, LLC. All Rights Reserved. The material on this site can not be reproduced, distributed, transmitted, cached or otherwise used, except with prior written permission of Multiply.