Welcome to professrsavings.com, we teach finance basics.
Today we will teach you elasticity of demand in two minutes.
Let’s start the reason why you should care. Whether you will open a cupcake shop or become an entrepreneur, understanding pricing education is great to have.
Price elasticity of demand describes how changes in the cost of a product or a service affect a company’s revenue. We will jump into an example.
A change in price will dramatically influence how many units the customer will buy.
Understanding the price elasticity of each offering is crucial to generate the most amount of profit you can gain.
To calculate elasticity, divide the percentage change in quantity demanded by the percentage change in price.
Most of the time, the number will be negative since a price decreases generally results in shoppers to buy more of the product.
A number between zero and one indicates an inelastic good.
This means that the customer is relatively unaffected by the new price.
Hence, numbers above one indicate elastic demand where shopping behavior changes significantly.
Let’s break it down.
Several elements can affect the price elasticity of products.
Think about it this way. You need to consider that if you raise the price of cupcakes you have to prepare that there are other options. Customers can purchase cookies as an example.
Let’s take an example of a car company called Unicorn Inc.
Let’s say that they increase the price of their popular sedan by a good amount.
The customer is inclined to shop at different dealers or just not buy a car.
However, public transportation consumers have few options. So commuters riding train or bus won’t fuse over a small increase in fare.
A great CEO will understand that rising prices to increase profit makes sense but all the while consider the perspective of their consumers.