Learning Business: What is Price Elasticity?

By: TINA BOUTIS


posted on: April 18th, 2016

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Imagine this: You go to the store to buy your two favorite things: mangoes and water. You are about to pay, when you see the price of both of these items has doubled! It is just your luck that the store owner decided to change these prices. You put your mangoes down, but go to pay for the water. Why did you choose to purchase the water and not the mangoes? The answer is price elasticity.

ELASTIC PRODUCT – THE MANGOES

You put down the mangoes because after a price increase, you did not feel they were worth it. For the price you were going to pay for mangoes, you could buy more oranges! At their new price, you did not see them as a necessary purchase. You were sensitive to price. A product whose price change causes a change in the amount purchased, is considered to be elastic. Products which are seen as elastic are usually not necessities. People think, and know they can live without them, and are not willing to spend extra money on them. When your item is elastic, you need to be careful. Changing the price, will change your sales.

INELASTIC PRODUCT – THE WATER

Now consider the water. Water is a need. No matter the price, you will still need it to survive. Even if the price doubled, you would be willing to pay for it. This is an example of price inelasticity. Inelastic items are usually things we need to survive, or that cannot be replaced.

The apples we talked about before, can be replaced by similar fruits. Water, on the other hand, cannot. Because we need water to live, and it cannot be replaced, we have to buy it no matter the price. This also applies to products for which there is aimagined value to the customers. For example, a smoker sees tobacco as an inelastic good, but a non-smoker does not. One of them would be willing to pay a high price, and the other would not even think about it! The more a person thinks they need something, and feels that they cannot satisfy that need elsewhere, the more inelastic it will be.

WHY IS ELASTICITY IMPORTANT?

When selling a product, it is very important to know whether it is price elastic or inelastic. If it is elastic, you need to be careful with how you select prices! Increasing the price even by a small amount, might decrease your sales by a lot. Decreasing it, might make sales increase so much that you would not be able to keep up with them! If your product is price inelastic, a change in price won’t result in such a big change in sales. You can raise your prices, and people will still have no choice but to buy them. You can also lower your prices, but it would not increase your sales by too much. Elasticity if very useful to know when you are deciding on the price of a product.
Here are some examples of each type of product:

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Mukama Juma
Mukama Juma

Interesting

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