Price elasticity of demand basically deals with price and quantity demand and their relationship. It evaluates how a change in price can also create a considerable change in quantity demanded. Heavily influencing marketing mix and decision making with respect to price, it is one of the most important and necessary business tool and concept. Many of the important marketing strategies that you adopt which will possibly affect and change the entire course of your business are under the grasp of this theory. Also called PED, it greatly affects finance and other aspects of your undertaking as well. Even though the changes in price and elasticity of demand move in opposite directions, they seem to be tightly knit together. The co-efficient of elasticity of demand as a matter of fact is what concerns most. Once the price changes, the revenue and expenditure in terms of the product can be assessed. Also determination of price volatility after supply in market, for prices may shift from time to time. A lot of factors also happen to affect it. Determination of whether the product is that of necessity or luxury, whether a tactical price war is on its brinks, peak and off peak demand as well as habitual consumption. The key point here is that, this calculation is often an estimate and can be changed given time and space. The market is constantly growing, open to changes and full of surprises. The customers are also the same. Sometimes sensitive to price variations and not big fans of sudden circumstances. Price and demand have always been major ingredients in this mix. The demand and supply cycle works one way, but this one, this one lays down the path itself. Customers are the kings and Queens, and while their demand will be high, disappoint them and charge them beyond a line, and your business can go to pieces. Not all products have the same future or capability to do well nor the endurance and power. Price changes are to be intricately dealt with keeping in mind that without demand, there’s no point of supply. Some products are inelastic and work well with change. Elasticity assumptions differ from product to product. The responsiveness of each product is relative. Whereas, some just bring down the profit margin. It’s critical to a business to not stretch to a point, it can’t take it anymore. It simply breaks then.
The more discretionary a purchase is, the more its quantity will fall in response to price rises, that is, the higher the elasticity. So, if you are considering buying a new washing machine but the current one still works (it’s just old and outdated), and if the prices of new washing machines goes up, you won’t end up buying it then. You’ll wait for the prices to either fall or wait for your current machine’s condition to be worse enough to need a new one. The prices are also “elastic” if the rise of that of one product leads to rise in demand for another one. For example, if the price for headphones rises, customers will willingly resort to buying earphones. Substitution is a great idea in such a case. This is when price is elastic.
The concepts of business and marketing keep changing, evolving and maturing. So do the customers and ultimately with technological advancements and the rising tide of globalisation, wants needs and preferences all are going through a character change. At such a time, this concept becomes very important. And more so, the equilibrium!