While gasoline in general is inelastic, specific gasoline brands are elastic. These goods are considered “elastic.” Let’s go back to gasoline. On the other hand, some products will experience wild swings in demand even if price changes are minor. If prices drop 10 percent, you might fill up your tank but unless you have somewhere to store gasoline, you won’t be stocking up. If prices rise by 20 percent, you’ll still pay because you need to get to work and what not. Even dramatic changes in prices may not spur big changes in demand. Some products are considered “inelastic”, however. If you cut prices in half, you could see sales surge! If you drop prices by 10 percent, you may drive some sales. If you decrease the price of your books by say 1 penny, you probably won’t gain many (if any) new sales. The more dramatic the increase in prices, the steeper the drop in demand. The decrease in demand is inversely related to the rise in prices. As prices rise, some customers will start to look for alternatives or simply skip the purchase all-together. Generally speaking, the higher the price the lower the demand. Let’s take a closer look at price elasticity and demand.Ī Closer Look at How Price and Demand Are Related Do you think more or fewer customers will come? Almost certainly, fewer customers will show up.Įssentially every business owner knows that increasing prices will decrease sales and vice-versa. Think about your favorite restaurant for a second. Price elasticity refers to how much demand changes when prices increase or decrease.Įven those business owners who haven’t studied economics will have an intuitive understanding of price elasticity. It is one of the most important concepts in both economics and business. You probably first heard of price elasticity all the way back in your high school economics class. One concept worth considering when formulating your pricing strategy is price elasticity. However, crafting an effective pricing strategy is a must. So how can you determine the right price? It’s easier said than done. If your prices are too cheap, you’re missing out on potential profits. If your prices are too expensive, you will lose out on customers and sales. Your pricing strategy will play a big role in determining the success or failure of your company.
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