Price elasticity of demand and its effect on price Essay
Price elasticity of demand can be defined as a measure of the responsiveness in amount of quantity demanded to change in price of the same good or in other word it can be defined as the percentage change in amount of quantity demanded as per the percentage change in price. Ped= ? (q2-q1) ? (p2-p1) Where ped= price elasticity of demand Q1= amount of quantity consumed before the price change Q2= amount of quantity consumed after the price change. P1= original price of good. P2= new price of goods The concept of elasticity is of importance to marketers since it assist them to choose the pricising strategy to adopt for goods.
Though the cost of manufacturing goods is one of the determinant in fixing prices to participate more aggressively in the market, marketers should be able to analyze all the substitute goods the face in the market , complement and prices changed by competitors as this all will determine the actual price to be charged for goods and services. Price elasticity of demand 2 Through the law of demand where prices of goods and services rise consumers will react by reducing the amounts of quantity demanded or substitute the product with
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For instance if price of tea increases consumers may opt to consume coffee or rather use soft drink and this all serve to satisfy the same need to the consumer. Where a small change in price cause demand to change to a greater extent then such goods are said to have a high price elasticity of demand (Green hurt, Norman & hung, 1987). Where demand for a good is perfectly inelastic then changes in price does not affect the quantity demanded. For instance a patient who requires a kidney transplant will pay anything to acquire it and even if the price is reduced to zero the consumer still requires only one kidney.
Such goods can be illustrated by the following graph. Price Demand curve Q1 Quantity Lowering the price to zero the consumer will require quantities q1 and even if the price is increased to infinity the consumer will still demand quantity q1. Other goods can be said to be relatively inelastic and for such goods changes in quantity demanded is less than changes in price. Some of the goods which fall in this category are those for which no substitute exist e. g. if an aid drug can be invented with ability to kill HIV virus then consumer would be willing to pay any thing to acquire the
Price elasticity of demand 3 drug to cure the infection. For such goods increase in price lead to an increase in revenue and vice versa. Perfect inelastic goods have price elasticity of zero while for goods which are relatively inelastic price elasticity is less than one. Price elasticity of demand is said to be elastic where a change in quantity demanded is more than a change in price. For goods which fall in this category increase in price will result to a decrease in total revenue and vice versa. Most goods consumed by the household fall in this category due to availability of substitute and competition in the market (kotler, 1982).
Where change in quantity demanded is equal to a change in price then such goods are said to have unit elasticity. In the current market situation it is very hand to find such goods. For such goods when you decrease price by half demand doubles and demand decrease by a half if price is doubled. The other category of goods are said to be perfectly elastic. For such goods a small increase in price will cause the demand for the commodity to drop to zero therefore causing producer revenue to fall to zero.
The demand curve is horizontal and a slight decrease in price will cause demand to increase to infinity. And in the real world such goods rarely exist. Marketers must consider the price elasticity of goods before fixing price as this affect demand and revenue to the firm. Furthermore marketers should know that the elasticity of demand for goods are different in the long term and short term therefore they should continuously revise their elasticity in order to fix the correct price and keep a breast of competitors. Price elasticity of demand 4
In determining the elasticity of demand for a product or service then the following factor should be considered. a. substitutes The more substitute a product has the higher the elasticity as more people will switch toward other goods when price changes. b. percentage of income If a product occupy or takes a greater share of consumers income then the higher the elasticity of such goods as more people will be careful in purchasing the good. c. necessity Where the goods are necessary for survival of consumers then the lower the elasticity e. g. basic goods(sandhusen, 2000).
For a company in automobile industry the price elasticity of demand can be said to be elastic as cars consume a greater portion of consumer income, have many substitute and also they are not a necessity to consumers. Price elasticity of demand 5 References GREENHUT, M. L. , NORMAN, G. , & HUNG, C. -S. (1987). The economics of imperfect competition: A spatial approach. Cambridge [Cambridge shire]: Cambridge University Press. Kotler, P. (1982). Marketing for nonprofit organizations. The Prentice-Hall series in marketing. Englewood Cliffs, N. J. : Prentice-Hall. Sandhusen, R. (2000). Marketing. Hauppauge, N. Y. : Barron’s.