understanding the price elasticity of demand

it is nowadays paramount, the need of understanding the price elasticity of demand as competition for new business becomes stiffer and competition for existing customers also intensifies, companies are finding it increasingly difficult to make money. in an environment where the cost of doing business has risen dramatically, companies are often forced to adopt innovative ideas in order to increase their market share. however, one of the least cost-effective ways to do this is by pricing goods or services too low.

understanding the price elasticity of demand provides insight into why the price of a particular good or service remains unchanged even as supply increases. in today's global marketplace, companies that offer products and services at attractive price-points may suffer from "demand deflation", whereby they become financially solvent but their customers continue to purchase fewer goods and services than they previously did. 

understanding the price elasticity of demand will allow you to identify products or services that provide high profit margins and maintain a consistent, though sometimes reduced, level of consumption. understanding the price elasticity of demand will help you achieve long term, sustainable growth, and achieve a higher level of success for your business.

understanding the price elasticity of demand can help you understand why price competition can be so fierce in a time of economic slowdown or change. one of the most important keys to maintaining a competitive edge is the ability to reduce costs while meeting consumer demand. one of the keys to achieving this goal is to have a strategy that involves the consistent application of discounts and price elasticity tactics. understanding how demand, on its own, impacts prices allows you to implement strategies that reduce overall demand through the use of demand management techniques.

understanding the price elasticity of demand and its relation to substitutes allows you to identify key factors that affect demand. the concept of demand elasticity, which is defined as a company's ability to change its prices in response to changing consumer demands, can help you understand why some companies have increased their profit margin while others have lost theirs. 

for example, food manufacturers can increase the cost of their products because they face increasing competition from retailers of other types of food. however, these same manufacturers can lower their price if they find substitute products that are lower in price. the key here is being able to find substitutes for customers who are looking for these products at a lower price than the one that these retailers offer. understanding this concept helps you to develop strategies that will allow you to respond quickly to demand changes.

in addition, understanding the concept of demand elasticity allows you to recognize trends in the consumption of products. it is important, in marketing, identify patterns in the purchase of various items. if you are marketing a product that has several substitutes, you may notice that a particular demographic buy a specific product more often than another demographic. this is because these products are low in price relative to the items that it is competing with. understanding the relationship between the quantity purchased and the price per unit is key when you are developing a strategy.

another factor to consider is price elasticity. price elasticity is a technical term that indicates how quickly the market will change. if you watch the retail sales of the items that you are attempting to sell, you will notice that the prices tend to change rapidly. if the product is not changing, then this suggests that the consumers are not sensitive to the price change.

finally, there is inelastic elasticity. inelastic elasticity indicates that the demand for the item is constant, but the supply is changing. for instance, the cost of producing a particular item in china is relatively low, but it is still in high demand by american consumers. conversely, if you look at the cost of producing identical items in the united states and in china, the american product will become cheaper. understanding the concept of inelastic elasticity is important if you are trying to sell a product that experiencing a large demand, but the supply is static.

one final example is called the zero-cost-price structure. this occurs when there is no variation between supply and demand. in this case, the prices are constant for all items and the firm simply sells the items at the same price. it uses demand measures and other tools to determine the equilibrium price. understanding these concepts can help you determine which pricing models make the best business decisions.

article by: mirko francioni