What is the price elasticity of demand in the first place?
In the first place, the price elasticity of demand is a quantification of how much the demand changes when the prices of goods and services fluctuate.
Customers tend to want to get the products and services they want as cheaply as possible, so the higher the price, the more likely it is that demand will decline.
"Price elasticity of demand is high" means that the rate of decline in demand due to the rise in prices is large. Therefore, you need to be more careful when raising prices.
"The price elasticity of demand is low" means that the price of goods and services does not decrease so much even if the price increases. In this state, it can be said that it is easy to adjust the price to some extent.
The price elasticity of demand is high. The price elasticity of demand is low.
Price will increase → Demand will decrease significantly
Price decreases → Demand increases significantly The fluctuation range of demand when the price fluctuates is small
If you can correctly grasp the price elasticity of demand, you can set the appropriate price for each product or service handled by the company. In addition, since the balance between the set price and demand can be optimized, stable business operation and future growth can be expected.
As mentioned earlier, the price elasticity of demand depends on how much the demand changes when the pricing changes. So how do you find the price elasticity of demand?
The formula for calculating the price elasticity of demand is as follows.
Price elasticity of demand = rate of change in demand (%) ÷ rate of change in price (%)
"Demand change rate" and "price change rate" are calculated by the following formulas.
Demand change rate = (Sales after price change-Sales before price change) ÷ Sales before price change
Price change rate = (Price after change-Price before change) ÷ Price before change
Therefore, even if the result of seeking the price elasticity of demand is negative, it must be converted to a positive value.
Now we discuss the some point about elasticity of demand .
Luxury items
Since luxury items are not always necessary for people's lives, price fluctuations are likely to have a significant impact on demand. Therefore, it can be said that many luxury items have high price elasticity of demand.
Goods for the masses
Products for the masses are also products of the genre with high price elasticity of demand. Since there are many competitors in this genre of products, customers have a wide range of choices, and price increases can easily be leaked to other companies.
Features of products with low price elasticity of demand
There are two product genres with low price elasticity of demand.
The following describes these features in detail.
Necessities
Necessities are a product genre with low price elasticity of demand. For example, products such as medicines and groceries. Since these are necessary for living regardless of the price, it is unlikely that the number of sales will change significantly even if the price changes.
However, this is the price considered for the entire market, and if there are many competitors such as "there are multiple drug stores in the neighborhood" and "there are multiple supermarkets around the home", the price is cheap even if it is a necessity. Customers will flow to the side. Also be aware that the price elasticity of demand can be high depending on market conditions and the necessities handled.
Products with originality
Since there is little competition for original products, it can be said that demand is unlikely to change due to price fluctuations.
For example, high-end school bags and tools used only by specific industries. Although there is a certain amount of demand for these products, there is little competition, so it is unlikely that the number of products sold will decrease significantly even if the price rises. You don't have to be involved in price competition with competitors and make unreasonable price cuts, so raising prices will greatly increase sales and profits.
However, it is difficult to get a lot of customers by reducing the price because it is likely that a product with originality has already acquired a lot of demand. As the times change, demand may disappear, and depending on the situation, the business may be forced to shrink or withdraw.
Utilization of price elasticity of demand
In order to formulate a business strategy that considers the price elasticity of demand, it is necessary to know when to utilize this concept. There are three situations in which the price elasticity of demand can be utilized.
The following describes these situations in detail.
When pricing new products and services
Sales of newly developed products and services vary greatly depending on the price, so it is necessary to consider the price elasticity of demand.
For example, if you sell a product with a low price elasticity of demand, such as a high-end school bag, you will be able to generate some sales even if you set a price higher than the market price of the school bag market.
On the other hand, in a market with high price elasticity of demand such as detergents, it is highly likely that sales will be sluggish if sold at a price higher than the market price. Products with high price elasticity of demand should be set at the lowest possible price.
However, since various factors such as purchasing cost, labor cost, advertising cost, and brand power affect the price setting, it is not preferable to set the price only by the price elasticity of demand. Let's use the index as a reference when setting the price.
When adjusting the price of goods and services
Take advantage of the price elasticity of demand not only when selling new products and services, but also when adjusting the prices of products and services that are already on sale.
As a specific example, if you want to increase the number of customers and sales by implementing a price reduction campaign, it is more efficient to discount the products with high price elasticity than the products with low price elasticity of demand. I can put it out. When deciding on a product with a high price reduction effect, it is recommended to select a product with a price elasticity of demand greater than 1.
When thinking about retail store strategies
When a company asks a retailer to sell a product or service, it needs to set the right price by analyzing the sales data at the retailer to determine the price elasticity of demand.
Retailers tend to hold events such as "sale sales" and "discount campaigns" to get more customers to use the store. However, if such an event is held without considering the price elasticity of demand, it will not be possible to secure sufficient sales even if the price is reduced.
In addition to price cuts, there are other ways to increase the number of customers and sales by changing the advertising method or proposing related products to increase the purchase price per customer. In order to successfully increase sales at each retail store, it is important to formulate a sales strategy while also referring to the price elasticity of demand.
Today we learn about elasticity of demand now if there is any problem on this topic you can comment in this post and ask any questions about economics.
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