Other Internal and External Considerations Affecting Price Decisions
{"Image DocumentName": "Other Internal and External Considerations Affecting Price Decisions", "Image ImageDescription": "Price elasticity of demand illustrates the response of demand to a change in price Inelastic demand occurs when demand hardly changes when there is a small change in price Elastic demand occurs when demand changes greatly for a small change in price Price Elasticity of Demand. Consider the two demand curves in Figure In Figure 10.6A, a price increase from P1 to P2 leads to a relatively small drop in demand from Q1 to Q2. In Figure 10.6B, however, the same price increase leads to a large drop in demand from Q\ua78c1 to Q\ua78c2. If demand hardly changes with a small change in price, we say the demand is inelastic. If demand changes greatly, we say the demand is elastic. The price elasticity of demand is given by the following formula: Suppose demand falls by 10 percent when a seller raises its price by 2 percent. The price elasticity of demand is therefore -5 (the minus sign confirms the inverse relation between price and demand), and demand is elastic. If demand falls by 2 percent with a 2 percent increase in price, then elasticity is -1. In this case, the seller\u2019s total revenue stays the same: The seller sells fewer items but at a higher price that preserves the same total revenue. If demand falls by 1 percent when price is increased by 2 percent, then elasticity is -, and demand is inelastic. The less elastic the demand, the more it pays for the seller to raise the price. What determines the price elasticity of demand? Buyers are less price sensitive when the product they are buying is unique or when it is high in quality, prestige, or exclusiveness; substitute products are hard to find or when they cannot easily compare the quality of substitutes; and the total expenditure for a product is low relative to their income or when the cost is shared by another party. If demand is elastic rather than inelastic, sellers will consider lowering their prices. A lower price will produce more total revenue. This practice makes sense as long as the extra costs of producing and selling more do not exceed the extra revenue. At the same time, most firms want to avoid pricing that turns their products into commodities. In recent years, forces such as dips in the economy, deregulation, and the instant price comparisons afforded by the Internet and other technologies have increased consumer price sensitivity, turning products ranging from phones and computers to new automobiles into commodities in some consumers\u2019 eyes. Marketers need to work harder than ever to differentiate their offerings when a dozen competitors are selling virtually the same product at a comparable or lower price. More than ever, companies need to understand the price sensitivity of their customers and the trade-offs people are willing to make between price and product characteristics. Price elasticity of demand = % change in quantity demand. % change in price. Copyright \u00a92014 by Pearson Education, Inc. All rights reserved.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}