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SLP 1
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SLP 1
Elasticity of Demand
Price elasticity of demand is one of the fundamental principles of economics, which measures the responsiveness of the quantity demanded for a good when its price changes. If the demand is elastic, a small rise in price will cause the demand to fall sharply. However, when the demand is inelastic, the changes in price will not make much difference for the demanded quantity (Tiedemann et al., 2023). For the business owner, understanding price elasticity helps them make the right pricing decisions for maximum sales and profits.
Impact of a 5% Price Increase on Demand
If the price is raised by 5%, the effect on demand will depend upon the elasticity of the good. If the good is elastic (i.e., non-essential goods or luxury goods), the demand will fall heavily (Li et al., 2023). Consumers will switch over to some other good or will reduce their consumption. However, if the good is inelastic (i.e., essential good or one-of-a-kind good where the good has very close substitutes available), the demand will not fall much even after the price increase. For instance, if the business is selling one-of-a-kind customized work with not many substitutes, raising the price by 5% will not make much impact on the demand. However, when the business is selling something like bottled water, raising the price by 5% will make the buyers switch over to the competitors. Hence, prior to raising the price, the elasticity of the commodity has to be evaluated so as not to lose the buyers.
Impact of a Short Introductory Period on Demand
An introductory period is one form of common price strategy where the product is priced lower for some brief length of time for the objective of inducing buyers. If the introductory period is brief, the potential buyers will not have the ability to hear about the product and gain experience from its use. Therefore, the demand will not grow extensively when the price is raised. Nevertheless, when the introductory period is larger, the greater base of buyers gain experience, thus resulting in increased demand even after the price is raised (Tiedemann et al., 2023). For instance, if a tech firm introduces a new smartphone, it can provide an introductory discount for one month. Suppose the introductory period is only one week. In that case, most buyers will not have gotten the opportunity to buy the product for the reduced price, resulting in reduced overall sales. An optimum introductory period assists the firm in establishing the brand and lets the buyers evaluate the product’s value.
Price Reduction Required to Increase Sales by 25%
The percentage by which the price needs to be reduced to achieve a 25% increase in sales depends on the price elasticity of demand. Using the elasticity formula:
PED = (%change in quantity demanded) / (%change in price)
If the product has a price elasticity of demand of -2, then:
-2 = (25%) / (%change in price)
Solving for the required price reduction:
%change in price = (25%) / (2) = 12.5% (Li et al., 2023).
This means the price has to decrease by 12.5% for the sales to increase by 25%. However, when the elasticity is lower (closer -1), the price decreases even more. One has to find the elasticity of the business’s products for the right price-related decisions.
Economic and Non-Economic Factors Affecting Global Market Reception
Economic Factors
· Competitor Pricing: If similar products from the competitors sell for less, the buyers will switch to the less expensive versions unless the product is superior in value.
· Income Levels: A country’s level of income influences the amount the consumer is willing to pay for the good. Higher-income levels can afford increased prices over lower-income levels, thus affecting the level of demand.
· Inflation: When inflation is high, the price level for goods and services increases, lessening the purchasing capacity of the consumers. This decreases the demand for non-essential goods, as individuals prefer essential things over them.
· Exchange Rates: The continuous change in exchange rates leads to higher prices for imported products. Market demand for imports changes when the local currency gains value because import prices decrease, but the market demand swings the opposite when currency value decreases because import prices rise.
Non-Economic Factors
· Brand Reputation: A known brand develops customer loyalty through the decreased price sensitiveness of buyers towards its products. Demand is subject to the credibility of the name of the brand.
· Government Regulations: Government regulations impact the affordability and accessibility of the product, like taxations, import bans, and tariffs in many different nations. To ensure market entry, local regulations need to be complied with.
· Cultural Preferences: Consumer preference patterns differ by the culture and traditional backgrounds of the person. Consumer favorites trend extensively in some geographical points but not others because their religious beliefs differ from one geographical point to the next.
· Social Trends: The consumer culture changes over the years through societal movements and rising global awareness. Higher consumer demands for ecologically friendly products support the market for clean energy resources and ecologically friendly packaging.
· Technological Changes: Changes within the sector rapidly make the available products obsolete. To remain competitive, the business must continuously involve itself in innovative activities.
References
Li, Y., Shao, M., Sun, L., Wang, X., & Song, S. (2023). Research on Demand Price Elasticity Based on Expressway ETC Data: A Case Study of Shanghai, China.
Sustainability,
15(5), 4379.
Tiedemann, S., Sgarlato, R., & Hirth, L. (2023). Price elasticity of electricity demand: Using instrumental variable regressions to address endogeneity and autocorrelation of high-frequency time series.
arXiv preprint arXiv:2306.12863.
