Price Elasticity

Price elasticity refers to the measure of the responsiveness of the quantity demanded of a product or service to a change in its price. In other words, it indicates how much the demand for a product or service changes when its price changes.

Price elasticity helps businesses determine the optimal price for their products and services, make better decisions when setting prices and also speculate the long term impact of price changes. 

It also gives businesses a good understanding of how their products or services are being perceived by the customers based on which category of price elasticity their product falls under.

That is, whether the product is price elastic, Inelastic or unit elastic.

Types of price elasticity

There are three types of price elasticity (as mentioned above). These are;

Price elastic - a product or service is said to be price elastic when a small change in price will have a huge impact on its demand. 

‍Price Inelastic - a product or service is considered priced Inelastic when a small change in price has little to no effect on its demand. 

Price Unit Elastics - a product or service is considered price unit elastic when a change in price is met with a corresponding (equivalent) change in demand. That is, the rate of change is equal and not too large (as seen in products that are price elastic) or too small (as seen with products that are price Inelastic).

How to calculate price elasticity

To calculate price elasticity of a product or services, divide the change in demand or supply of the product or service by the change in price. 

If the value is greater than 1 then the product is price elastic

If the value is less than 1 then the product is price Inelastic

If the value is equal to 1 then the product is unit elastic. 

Application of price elasticity 

There are several ways in which business owners can use price elasticity and some of these include;

Maximizing profits - information on the price elasticity of a product can be used to maximize profit by offering the product at a price that won’t trigger price sensitive customers and at the same time increase revenue for the company. 

‍Entering a market - with data on price elasticity, a company can accurately predict where their product sits in terms of pricing and the best price that will enable them to snatch a share of the market without losing out on profit. 

‍Deciding on which pricing strategy to use -  price elasticity is important when deciding on the best pricing strategy for a product and when offering promotions and sale discounts. 

Note

Price elasticity is not constant across all markets. It varies depending on the type of product and the market. For example, everyday food items are not too sensitive to changes in price since they are essential items. But luxury goods on the other hand are very sensitive. 

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