Demand happens to be elastic for luxurious commodities due to an infrequent purchase of these commodities. When the prices of the commodity increase, the demand for the quantity will decreases because people will not willing to spend more money on this product.
At the same time, when the price of the commodity decreases, the demand will increase. Here, the Price factor will lead to the quantity of consumption of the commodity or consumption of other available substitutes in the market to be decreased or increased. In terms of revenues , increase prices of the commodity will decrease the demand which will lead to a decrease in revenues and vice-versa. Graphically, the Elasticity of demand is represented by price and quantity demanded.
Inelastic demand, Quantity demanded fluctuation is more with respect to the change in price. When prices of the commodity will increase, the demand will decrease and vice-versa.
A more elastic curve will be horizontal. The demand for a product is considered price elastic whenever the ratio of percentage change of demand divided by percentage change in price is less than one. Here, the Demand determinants impact will be low or negligible due to the nature of consumption. Demand for necessity commodities is inelastic due to a frequent purchase of these commodities for basic needs by the consumer. The demand for quantity will not get much affected much by the decrease or increase in the price of these commodities.
An inelastic demand of the commodity will not lead the more changes in the revenues due to the stable demand of the commodity. Graphically, Inelastic demand, Quantity demand fluctuation will be negligible or no with respect to the change in price. More extreme changes in price may elicit significantly different consumer responses. Therefore, elasticity can often be an inexact calculation. Avery points out that in a digital context, this is easy and inexpensive to do.
Understanding the why behind consumer behavior is critical to predicting how they will respond in the future. Therefore, smart marketers supplement any quantitative testing with qualitative research to get at the underlying reasons for consumer behavior.
Ultimately, you want to stay relevant to consumers and differentiated from your competitors. Once you do that, you can adjust price up or down to better represent the level of value you are providing to your customers. Your current price elasticity is just one data point that helps you make those future decisions.
Read refreshers on net present value , breakeven quantity , debt-to-equity ratio , and cost of capital. You have 1 free article s left this month. Let us take the example of tea and coffee where both are the substitute for each other.
Say, people prefer coffee over tea when the price of coffee is lower than that of tea. However, as the price of coffee increases more and more people start to shift to tea and vice versa.
This situation is a perfect example of an elastic demand for a product. The price elasticity of demand for the elastic product is more than equal to one as the percentage change in demand is greater than the percentage change in price. Common examples of inelastic demand are gas and fuel, electricity, and consumer goods. This is due to the fact that there are very few good substitutes for gasoline and as such consumers have to buy the gasoline even at relatively higher prices. This situation is an example of an inelastic demand for a product.
The price elasticity of demand for the inelastic product is less than one as the percentage change in demand is less than the percentage change in price.
The elasticity of demand is a metric to measure the impact of variation of the price of a product on the quantity demanded by consumers. The products with no or few substitutes exhibit inelastic demand while the products with an easily available large number of substitutes display an elastic demand since the consumers have the option to switch to other substitutes when there is any change in the price of the product. Also, the necessary product segment will exhibit inelastic demand while luxury and comfort products will have demand which is elastic in nature.
Hence, it can be said that the primary driver of the elasticity of demand is the availability of substitutes and the necessity of the product for the survival of the population. This has been a guide to Elastic vs Inelastic Demand.
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