The changes in demand and the cost of a product are crucial to the efficacy of business. More importantly, the two variables in question are often codependent. Although claiming that one inevitably affects the other would be quite a stretch, the correlation between the two allows locating the pricing strategy of an organization and defining its place in the global economy realm. In economics, the concept of elasticity is used to denote the correlation between the demand for a certain product or a commodity and its price (Mankiw 90). To put it differently, the degree to which the target customers need a particular product or a service define the price that a company may set for it.
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Price Elasticity of Demand: Calculation
To locate the price elasticity of demand, one will have to divide the change in quantity by the change in the price of a product or a commodity (“Gasoline Prices Tend to Have Little Effect on Demand for Car Travel” par. 4). Therefore, the degree of price elasticity in the examples provided will equal the following:
The correlations displayed above show the principle of elasticity in action. Since the elasticity rates of the pack of cigarettes (example B) are lower than those of the price for a laptop, it can be assumed that the PED for the laptop is more elastic. Therefore, the price and the demand for the laptop are in direct proportion to each other unless other factors are introduced into the equation.
Elasticity and Its Importance for Business
The concept of elasticity is crucial for making business as it helps set proper expectations concerning the purchase rates and the customer behavior in the target market. As a result, a company will be capable of setting an adequate price that will attract the target denizens of the population. As a result, the competitiveness of an organization is likely to increase.
The demand to cross a bridge cannot be viewed as elastic as it barely has anything to do with any of the factors outside of the necessity to get to the other side of the river. Therefore, it is essential that the toll for crossing the bridge should remain inelastic; as a result, the demand of the customers will be satisfied (“Elasticity” par. 5).
The price elasticity rates for beachfront properties can be deemed as rather high since the price for renting or buying a house located at the seashore depends greatly on the season and, therefore, the number of customers (Tran 123). For example, the prices are expected to rise together with the demand when the summer starts and the holiday season begins. Similarly, prices will drop together with the demand rates once the holiday season is over and the number of people willing to go on a vacation reduces.
The concept of elasticity for the specified type of goods can be viewed as elastic since the product under analysis can possess certain qualities that set it apart from other types of coffee. The competitiveness of the business, therefore, defines the rates of elasticity to a considerable degree. The price could be influenced by the quality of the raw material, the type of cooking, etc. Consequently, the demand for the product shaped by the customers’ requirement for a high-quality product will be affected by the quality of the goods to a significant degree. The above observations lead to the assumption that the elasticity of the price is moderate in this case.
In contrast to the previous example, elasticity cannot be viewed as the characteristics of prices for gasoline. Indeed, the demand for the specified product is expected to be very high disregarding the price. The fact that most cars run on gasoline is the explanation for this phenomenon. Although one might argue that hybrid cars are currently viewed as an alternative, hybrids are very expensive and have not yet ousted the vehicles running on gas from the market, hence the lack of elasticity.
While an increase in price is likely to trigger a drop in demand for the product, cell phones still remain an essential part of modern life. Therefore, the price elasticity for the device should be viewed as low (“The Inelasticity of Staying Connected” par. 3).
Price Elasticity and a Flower Shop
Raising the price for flowers will be most reasonable at the points where demand for the specified product increases. Therefore, increasing the product price on holidays, especially the ones such as St. Valentine’s Day, will be an adequate step to make.
Elasticities in the Flower Business
Agricultural innovations that allow for producing an increasingly large amount of goods on certain occasions such as the above St. Valentine’s Day are the key elasticities in the flower business. Helping meet the increasingly high demand rates, the specified type of elasticities offers a plethora of opportunities for a startup company such as the flower shop business.
Elasticity 2015. Web.
Mankiw, Gregory. Principles of Macroeconomics. Stamford, CT: Cengage Learning, 2012. Print.
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McEachern, William. ECON: MICRO4. Stamford, CT: Cengage Learning, 2014. Print.
The Inelasticity of Staying Connected 2015. Web.
Tran, Xuan. “Price Sensitivity of Customers in Luxurious Hotels in U.S.” e-Review of Tourism Research (eRTR) 9.4 (2011): 122-133. Print.