What is price elasticity of demand and why do business owners need to keep an eye on it? The demand and sales of a product are not dependent on its quality and niche only. Certain economic factors make a difference to how the product progresses and price elasticity is one of them.
How is it defined?
In simple terms, it is defined as the ratio of change in quantity to the change in price. Economic equilibrium is established when the rates of supply and demand are equal. When there is a change in price, both these components change in either positive or negative direction. For instance, the decline in price may cause a rise in demand rate. This happens as more people are able to afford the product. However, all products are not elastic and may not get affected by price change. A low user count is one of the prime reasons.
Factors that make a product impact
A lot of owners suffer because they are completely unaware of the factors that impact the elasticity of demand. Thus, when the demand rate drops and they have surplus stored, it becomes hard to control the situation. Hence, if you are running a business and want to operate it successfully, be smart and know about these components.
Salary scale you belong to
Every person spends money according to the salary scale he belongs to go. Entrepreneurs should analyze the audience they are targeting. If your products are being used by high earning professionals, a lot of difference would not be made with price changes. Financial analysts play an important role in determining the impact that price changes make on product elasticity.
Financial experts are always engrossed in detailed calculations to measure the impact of price changes on product progress. Apart from studying behavioral impacts, they have to interpret numerical changes for price and quantity. Thus, most of them use price elastic for demand calculators for attaining 100% accurate results. You can use this calculator on calculators.tech. These experts cannot afford to make mistakes because the future of the product depends on how they analyze figures. An incorrect elasticity figure may portray an image of the product that is not real. Other than that, with these tools, it becomes easier to detect how people of a particular pay bracket would react to a change in price.
Alternatives that exist
Some products have a monopoly and do not face any kind of competition. Thus, the buyer would purchase it whether its price is $10 or $100. We can consider gas rates as an example. In most cases, countries just have one company responsible for gas supply and there is no competition involved. Gas is a necessity and people cannot survive without it. Along with that, there are no substitutes. Thus, a change in price would not have any impact on the rate of demand.
The same conclusion cannot be reached about an anti-dandruff shampoo since it is a lot more elastic. Consider that the price of a particular brand offering the product increases suddenly, what would be the reaction of most people. If you cannot afford one shampoo, simply look for a cheaper alternate that suits you. Thus, when a product has substitutes, it has a higher elasticity level. Hence, the demand rate changes on a major scale.
High priced products are more elastic
We purchase several types of consumables from every monthly pay check. Some of them including eggs, tea, coffee, milk and rice are low priced products. A change in their rates would not create a lot of difference. This is because rises depend on the actual price. Hence, the demand rate would remain unchanged until there is a drastic increase (100% or more).
Some products are expensive and get majorly affected with cost changes. In other words, price elasticity of demand has a greater effect on them. Laptops are a related example in this case. They are not low priced like daily consumables. People purchase them when they have the desired budget. A cost rise can create issues in this case. For instance, consider there is a rise of 25% in the price of a certain laptop model. Most people who intend to buy one would either postpone the purchase for an indefinite span or opt for cheaper substitutes. Due to affordability problems, the requirement of used old models may increases. In a nutshell, it can be said that elasticity depends on the actual cost of the product.
Products that are used as addictive habits
Some products are only purchased to fulfill addictions even though they are harmful. Tobacco products fall in this category. Chain smokers would not stop smoking if the prices of cigarettes increase. Such consumables come with low elasticity and do not get impacted with a rise in the cost. This is because a lot of people cannot survive without them. Brands producing them do not have to alter their strategies a lot when there is a price modification.
The price elasticity of demand is an economic factor that affects the demand and supply for a sold product. This does not mean that every product gets majorly impacted and a lot depends on the niche it belongs to do. When you talk about high priced options particularly cars and electronic products, even a 10% rise in the rate causes twists and turns. High cost is one of the reasons. Secondly, people do not spend money to purchase them regularly. Thus, when there is a change, either the decision to make the purchase is postponed or eliminated forever.
A good price elasticity calculator can give you an exact insight or how a cost change would create an impact. Some products have a high elasticity which means that even small price changes can modify the requirement. Most daily consumables particularly the necessary ones are quite inelastic. They are necessarily purchased so the demand rate is mostly constant. A smart entrepreneur always keeps a check on the elasticity of the products he is dealing in. In this way, it becomes easy for him to design an alternate strategy.