Is paper an inelastic good?
What are inelastic products and how do they affect pricing strategy?
Have you ever loved a product so much that you would buy it at any price? Would you be willing to go without soap if the price went up 100 percent? Have you ever spent more on a luxury item from your favorite brand than you would admit to your friends?
If you answered "yes" to any of the above, you already know intuitively what an inelastic product is.
Price has a huge impact on consumers, and price changes can have a ripple effect across the market as consumers change their behavior in response to price. Brands and retailers need to understand the concept of price elasticity and inelasticity if they are to predict how the market will react to a change in price.
In this article we will look specifically at inelastic products and prices. We look at what elasticity and inelasticity mean, some examples of inelastic products, and how they can affect your pricing strategy.
What is price elasticity and inelasticity?
In economics, price elasticity is a term that refers to the change in demand for something when its price changes. In general, when the price rises, the amount demanded decreases and vice versa. This is generally illustrated by a demand curve with quantity demanded on the x-axis and price on the y-axis.
Overall, elasticity is a concept that helps economists and businesses understand and measure how a change in price affects consumer behavior. Does price play a role in how buyers feel about that specific product?
Inelasticity is the reflection of elasticity. For which products and markets are prices not (or only a very limited) factor in buyer behavior?
Price elasticity is a term that refers to the change in demand for something when its price changes.
Elasticity and inelasticity of demand
The elasticity of demand describes how sensitive the demand for something is and can be measured by economic factors such as price or income. Price is the most common way of measuring the elasticity of demand.
In essence, the price elasticity of demand measures how strong the demanded quantity of a good is when the price changes. If the price goes up, how much does the quantity demand decrease? If the price goes down, how much does the demand increase?
Inelasticity of demand refers to certain goods for which changes in price do not affect the amount demanded too much, if at all. An inelastic product is one where the price can change drastically and the quantity demanded is not significantly affected.
The equation for measuring the price elasticity of demand is:
Price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price)
This formula generally gives a negative output because price and quantity demanded are inversely related, although the output is usually expressed in its absolute value. This enables you to see whether an increase in the price by one unit corresponds to a decrease in the quantity demanded by one unit.
If the price elasticity is less than one, the good is inelastic because the increase in price by one unit did not result in a decrease in demand by one unit. If it is greater than one, the good is elastic. Here the price increase by one unit should reduce the demand by more than one unit.
If the output here is exactly one, we would say that the demand is unit elastic.
Examples of inelastic products
There are three main characteristics of a product that can predict the likelihood that it will be an inelastic product:
- The product has no close substitutes
- The product is a vital product, such as B. staple food, fuel, or household staple food.
- The starting price is low.
Petrol. If you don't want to get rid of your vehicle completely, you need to fill up with it. You can try to find alternative transportation if possible, but as long as you have a car you will likely be willing to pay for gas at any price.
Necessary household items. Soap, toiletries, batteries, paper products, etc. are essential for most households. If the price of one brand gets too high, one can switch to another, but a consumer is unlikely to forego something they deem necessary, unless in an extreme case.
Eat. This is obvious as everyone has to eat! Just like with household items, you can look for alternative brands and types of food, but most people won't be without them entirely even if the price gets higher than you want.
Very inexpensive item. How much does a pack of chewing gum cost? How much do Post-It Notes cost? You probably don't know because they are so cheap. If products like these examples are already starting at low prices, a jump in price may not scare consumers off as much as it would with something expensive.
Collectibles. There are usually no near-by replacements for collectibles, and dedicated buyers are willing to pay almost anything to get their hands on the coveted goods.
Luxury goods. Like collectibles, luxury goods also have a certain price inelasticity. Price is a factor in the buying process, but people who buy luxury goods are not necessarily price sensitive. They are willing to pay more for status, the feeling of owning a luxury good, and other non-price considerations.
How inelasticity can affect your pricing strategy
Brands and retailers thinking about how price inelasticity and elasticity can affect their strategies need to keep in mind that for any product, some consumers have a higher level of price sensitivity than others. Not every consumer reacts in the same way to a change in price, and this is important to recognize.
For example, when implementing a dynamic pricing strategy, you need to understand which customers have relatively inelastic price sensitivity to the product and which are very price sensitive. Knowing this, you can implement dynamic pricing and improve profitability by selling your product at a higher price to those who are willing to pay more.
Another situation where understanding the inelasticity of your product is critical is in haircuts or discounts. Discounts can be a great way to increase sales for a short period of time, but if you're selling an inelastic product, they're a waste. If customers aren't price sensitive, then it doesn't matter if they get an offer. In that case, you'd be sacrificing the margins for minimal profit.
Understanding inelasticity and elasticity is critical to any successful pricing strategy. Without it, your pricing strategies and tactics will always lack a vital insight into how your customers will react to price changes.
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