Price elasticity of demand is the rate that expresses the responsiveness to price changes.
As a rule, there are products with different price elasticity. Knowledge the elasticity of demand for the product has great practical importance. For example, sellers of goods with a high elasticity of demand can set lower prices in order to dramatically increase sales and get quite more profit than if the price of the product was higher. Demand is elastic for goods whose value is palpable to the family’s budget. It can be car, furniture or household appliances.
If the products have substitutes the elasticity of demand will be higher. The demand for the current brand of shampoo, Dove, can be a good instance of it. If the price of this brand of shampoo rises, most buyers will go smoothly for other varieties. (Loreal, Pantene and etc.).
Inelastic demand – when increase or decrease of prices, in general, has no effect on the amount of consumption. Goods with inelastic demand are usually the goods which are necessary. For some it is clothes, for others – drugs. On holidays, for example on Christmas, you need to buy presents and Christmas tree, but the price for them will be high. Nevertheless, you will buy it, because for that period of time it is necessary. Also the samples of goods with inelastic demands are products which don’t have subtitles like petrol, bread, salt; products with high quality like Rolex watches, Ferrari, Prada and etc.
As we remember, the revenue from sales of products is equal to the quantity of sold goods multiplied by price. How are revenue and elasticity of demand related to each other? And how can seller make a profit using price elasticity of demand?
If demand is elastic at the price (Edp> 1), the reduction in price will lead to increase in the amount of seller’s revenue and increase of price will reduce it. That is, the dependence of the total revenue from the seller’s price changes in the case of elastic demand curve is inverse.
If demand is inelastic to price (Edp <1), the price reduction will lead to decrease in total revenue producer, and rise of price will increase in total revenue. The elasticity of demand is often very important for companies who need to find a price that will maximize the profit from sales, and hence it. If there is Unit Elastic Demand (E = 1), the value of revenue will not change under any circumstances.
If demand is elastic at the price (Edp> 1), the reduction in price will lead to increase in the amount of seller’s revenue and increase of price will reduce it. That is, the dependence of the total revenue from the seller’s price changes in the case of elastic demand curve is inverse.
If demand is inelastic to price (Edp <1), the price reduction will lead to decrease in total revenue producer, and rise of price will increase in total revenue. The elasticity of demand is often very important for companies who need to find a price that will maximize the profit from sales, and hence it. If there is Unit Elastic Demand (E = 1), the value of revenue will not change under any circumstances.
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