Price Elasticity of Goods
Date added: 17-09-15
Category: Advertising Essay
In general, businesses are aware of demand curves; however, it is rare that they actually know how to recognize those curves. In order to make sound business decisions, it is important to be able to recognize certain elements of a demand curve. For instance, if Apple raised its prices by five percent, what would happen to its revenues? The answer to this question depends on the response of Apple consumers. Will the consumer refrain from making purchases completely or just cut back on them? How a consumer responds to price changes is known as price elasticity.
The price elasticity of demand can be influenced by availability of substitutes, the level of necessity or luxury, amount of income required by the product, the time period considered and permanent or temporary price change. In regards to substitute or alternative products, the more substitute products there are, the bigger the elasticity. In reference to necessity or luxury, one must understand that luxury products have a tendency to have a greater elasticity than necessities. For some consumers, there are certain products that at the start have a minimal degree of necessity, but because they can be habit forming they turn into necessities.
Additionally, products that consumers are required to spend more for are more inclined to have greater elasticity. When considering the time period, elasticity is more likely to be larger over a greater period of time for the reason that consumers have more time to modify their behavior toward price changes. With respect to permanent and temporary price change, a one-day sale will cause a different response than a permanent price reduction of the same degree. The relationship of price elasticity of demand to microeconomics is consumer influence on prices.
As previously mentioned, price elasticity is the consumer’s response to price change. Microeconomics looks at how the decisions and behaviors of consumers shape the supply and demand of goods and services. It is this behavior that determines prices; which in turn shows how prices can determine the supply and demand of goods and services. A real-life example of a good that shows elasticity of demand would be cars. In the short term, the demand for cars would be to some extent elastic because a new car purchase can often be postponed or delayed. The demand for particular model would be considerably elastic due to the fact that there are numerous substitutes available. Almost every car manufacturer offers a sedan. Additionally, the purchase of a new car will require a substantial amount of a consumer’s income; making the demand for this product more elastic. Where the demand would be more inelastic is in rural areas. This would be the case because of the small number of alternative modes of transportation in rural areas. Over a longer period of time the demand for cars would most likely be inelastic in this scenario. Another example would be coffee.
To some, coffee is considered a necessity, but in reality it is a more of a luxury. The impact of price on a luxury item is more inclined to be elastic. While there are plenty of brands and flavors, coffee in simple terms would be considered inelastic. On the contrary, a latte has more substitutes; therefore would be considered more elastic than coffee. In conclusion, the price elasticity of demand refers to the way prices change in relationship to the demand and/or the way demand changes in relationship to pricing. It also refers to how much money a consumer is willing to pay for a particular good or service.
Having a keen understanding of these concepts will aid in our decision-making process as it relates to product distribution and pricing. References Economics Basics: Elasticity, (n. d. ), Investopedia. com. Retrieved on September 5, 2010 from http://www. investopedia. com/university/economics/economics4. asp Hubbard, R. G. & O’Brien, A. P. , (2008). Microeconomics, Second Edition. Prentice Hall Moffatt, Mike, (n. d), Price Elasticity of Demand. A Primer on the Price Elasticity of Demand. Retrieved on September 5, 2010 from http://economics. about. com/cs/micfrohelp/a/priceelasticity. htm