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Effects of Price Elasticity on a Product or Service

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Effects of Price Elasticity on a Product or Service

Scenario 1

When a product or service price and supply change it may influence the demand for

them. If the demand or the quantity purchased changes more than the price changes, the

commodity is regarded as being elastic (Andruszkiewicz et al, 2020). An example is when a

price might go up by 4% and the demand falls by 8%. Therefore, the price elasticity of a

commodity is the ratio of the percentage change in the amount demanded of a product or

service to the percentage change in price.

When a price change for a good, causes a significant change in its supply or demand

the product is said to be elastic. In contrast, when the price change of a product does not

cause much change in a good’s supply or demand the price is said to be inelastic

(Andruszkiewicz et al, 2020). Understanding the price elasticity of a good allows an

individual to make an enlightened decision in the application of pricing plans for the good.

Pricing Strategies for a Good

If the price change does not affect much the demand for a commodity a person may

increase the price. Goods that are inelastic would be affected little by a change in price. There

are certain attributes that make certain goods inelastic which are:

 When a good has few or no alternatives such as salt or petrol

 A good that is produced by a monopoly

 A luxury item such as diamonds.

 Strong brands such as Apple brand and its products.

Attributes that make goods to be elastic are:

 When there are many alternatives, the price of petrol is overall inelastic but if an

individual petrol station increases its prices customers will buy petrol from other

petrol stations.
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The price of a commodity can be increased in situations when the demand for the

good exceeds the supply available. In such cases, it will lead to a drop in the demand

especially if the commodity is price elastic so as to be able to satisfy the demand that is

willing to buy at that higher price point. Also, an increase in the price of inelastic goods

such as luxury goods will not lead to a drop in demand and prices should be reviewed

upwards from time to time (Bochanczyk-Kupka, 2019).

The price of a commodity can be decreased in situations where the good has many

alternatives and its price is elastic. An example is Tesco bread if you decrease the price of

the commodity the demand for the commodity will increase since people will switch to

buying the product and desist from more expensive alternatives.

In some situations, a price might be kept constant when an increase or a decrease in

the price will have no significant impact on the demand. Necessity goods prices should

not be changed.

Scenario 2

When the price elasticity of the product is -1.05 it indicates that an increase in the

price has caused a significant reduction in the product demands. In this case a certain

percentage increase in price causes the demand to fall by the almost same percentage. The

firm’s product is elastic and consumers are looking for alternatives when price increases.

Scenario 3

A firm might cut costs by analyzing and tracking the efficacy of its business and

looking for ways to be more efficient. Another way would be for the firm to eliminate

products that do not do well and also by cutting marketing costs.

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References

Andruszkiewicz, J., Lorenc, J., & Weychan, A. (2020). Seasonal variability of price

elasticity of demand of households using zonal tariffs and its impact on hourly

load of the power system. Energy, 196, 117175.

Bochanczyk-Kupka, D. (2019). Luxury Goods In Economics. Economic and Social

Development: Book of Proceedings, 122-127.