LESSON 2

PRICE
ELASTICITY
AND
INELASTICITY
ELASTICITY AND
INELASTICITY In economics,
In classical
inelasticity refers to a
economics,
market's reluctance

to let
elasticity refers to
go of a product even if
the degree of
its price goes up or,
sensitivity of a
contrariwise, inertia
market to changes
against buying more of a
in a product's
product just because its
price.
price goes down.
Price elasticity demand is typically
explained as the market's sensitivity
to changes in price. Formula-wise, it
is reflected by the following
equation:
∂ ∕ ∂∕
ϵP=( Q Q)/( P P)
If the change in price leads to a
proportionately equal or greater
∈≥
change in quantity bought (| | 1),
then the demand for the product is
said to be elastic.
In a highly elastic market, a
producer may be better off
finding ways to reduce because
the corresponding increase in
market size may more than make
up for the loss in gross margins.
If a change in price leads to a
proportionately smaller change
∈
in quantity bought (| |<1), then
the demand for the smaller
product is said to be inelastic.
 There are, however, a couple of expectations
to this general rule of demand that are
inversely reacting to price (and henceforth
having negative coefficients). These are:
1. Veblen goods- goods that become mor
sought after the higher their prices become,
often in the case of high-end luxury goods
(Veblen 1953); and more rarely.
2. Giffen goods- goods that end up being
preferred despite its price increase because
substitute goods prices are also rising as
well to the point that the former becomes
more attractive than the substitutes.
When the price of a product is set
too low, the market can perceive it
to be an inferior good, which leads
to negative opinions about it.
Therefore, when its price is raised
higher enough, it may actually be
perceived as being no longer
inferior; thus, leading to an increase
in sales.
The market is said to be price
elastic if the rate of change in
quantity Q is greater than the
rate in change of price P.
The market is said to be price
inelastic if the rate of change in
quantity Q tends to be less than
the rate of change in price P.
 LESSON 4

Pricing
Strategies
and
Applications
 ADAPTING THE PRICE

PRICING A NEW PRODUCT

If it is a new product that is being sold,
then the business can either skim the
market or penetrate the market.

Market skimming involves setting the

price high in order to milk the segments
with higher disposable incomes tiers,
with the price gradually being reduced
over time to milk the next income tiers,
and so on.
Market penetration
involves setting the price
even lower than planned,
if only to attact as much
of the market into trying it
and hopefully becoming
loyal to it.
 PSYCHOLOGICAL PRICING
Odd-number pricing- prices that ends in non-
rounded odd numbers. The presence of the
centavos also somehow communicates to the
consumer that the price is already set to its
lowest possible amount. The odd0end numbers
are seen to be friendlier or more palatable than
even numbers.
Free pricing.
 DISCRIMINATORY PRICING
Customer-segment pricing. If your
product is being offered in both an
upscale distribution point as well as a
retailer for a broader consumer market,
then you may be able to offer a different
price to each.
Product-form pricing.
Image pricing.
Location pricing.
Time pricing.
 PRODUCT MIX PRICING

Product line pricing. If Optional feature pricing.

you have a line of It is difficult to sell
products, chances are complete packages to
that many of these try consumers. It may be
to target distinct easier to sell them a basic
markets by being streipped-down model
placed at different first, then everything else
price points. becoming optional add-
ons.
Captive product pricing.
Companies that are in the business
of selling supplies tend to work this
way, to the point that they are
willing to sell the product at a loss
because they end up having the
customers as a captive market for
the consumables on which they really
make their money.
 By-product pricing. In case the
production of your product
generates by-products and you
manage to find a way to make
money out of these by-products,
then this becomes an opportunity
for realigning the price of your
primary product.
Product bundle pricing. If you have a
portfolio of products to sell, chances are
that not all of them would be fast-moving
goods. Some may be laggards or simply
be items that the market is not that
aware of. In cases like these, bundling the
slower moving products together with
star performers can be a strategic option.
The bundle will be offered at a discount.
TRADE DISCOUNTS,
VAT, AND TAXES
Trade discounts are the incentives that you
offer to resellers or participants as your selling
process. This can include commissions for sales
personnel.
VAT or value-added tax is a form of input tax
where the tax is earmarked onto the added
value that you firm produces.
Senior citizen discount is yet another
factor to consider. Assuming you are
selling a product that falls under R.A. 9994
or the Expanded Senior Citizens Act,
which includes restaurant and
medications. If your products are subject
to senior citizens discount, then note that
(a) seniors are exempted from VAT and (b)
20 percent of your net-of-VAT price i
removed as their discount.