Introduction
The modern business environment is characterized by extreme complexity and rapid development. Numerous changes occur every day, and to remain successful and profitable, companies should respond by altering their strategies and introducing appropriate measures. For this reason, market analysis is crucial, as it provides guidance on the approaches to retain the client’s interest and avoid a decline in sales.
At the same time, the quantities and prices of goods offered by different brands also change constantly, leading to radical differences in how people respond to these changes and shifts in revenue. That is why numerous concepts and tools are used to evaluate the current market state and improve decision-making for future actions. The elasticity of demand is one of these concepts applied to the modern setting to investigate it and avoid unexpected situations. The proposed paper focuses on determining the elasticity of demand, explaining the peculiarities of the term, and its importance.
Definition
In general, elasticity refers to the ability to return to the original shape after deformation. It means that it is close to the ideas of resiliency and firmness. However, in the business world, the term takes on new meanings. It measures how one variable responds to the change in other factors (Amacher & Pate, 2019).
Usually, there are two variables, such as the dependent and independent ones. The first one reacts to the development of the second, forming an interdependent system (Amacher & Pate, 2019). As for the elasticity of demand, it is the concept that measures how demand responds to a change in price. In other words, it is the responsiveness of quantity demanded to observed changes in price (Amacher & Pate, 2019).
In this regard, the elastic product is a good whose demand shifts significantly with price changes (Amacher & Pate, 2019). The elasticity of demand is calculated by dividing the percentage change in quantity by the percentage change in price (Amacher & Pate, 2019). The enhanced understanding of this measure is critical for realizing how markets and clients’ demands work.
Examples
In this way, the elasticity of demand shows that a customer’s buying behavior is flexible and may change in response to the market situation at any given moment. If the product’s elasticity is high, a price change will lead to a significant change in quantity demanded (Amacher & Pate, 2019). At the same time, reducing demand elasticity is one of marketers’ central goals, as it means a person will continue buying products regardless of price, and the required quantity will remain unchanged.
For instance, tobacco products can be viewed as having low or inelastic demand. Although there have been numerous price increases, the number of items sold remains stable, as consumers cannot refuse cigarettes because of their addiction. On the contrary, the higher price for chicken meat will lead to reduced consumption as customers will consider buying pork or beef. The examples show that elasticity depends on the ability to substitute the product, promote it, and maintain its current image (Amacher & Pate, 2019). For this reason, firms’ strategies critically depend on the given aspect.
Products Ranking
Furthermore, understanding the factors that impact customers’ behavior and preferences might help rank specific products based on their features. Thus, by analyzing the proposed products and ranking them from the most elastic to the least elastic ones, the following pattern can be offered:
- Blue-colored iPhone
- iPhone
- Smartphone
In such a way, the most elastic good is the blue iPhone, while the smartphone is the least elastic product. Several factors can explain it. The presence of substitutions is the first aspect, while the demand for the product, its popularity, and its role in clients’ lives are other vital factors that impact their choice. Thus, the blue iPhone can be easily replaced with another iPhone if the model’s price is higher because of its color. At the same time, although a particular cohort prefers iPhones, they can also be replaced by other brands. However, in the modern world, the smartphone is a hard-to-substitute tool, which explains its inelasticity and the stable, high demand for the product.
Conclusion
Altogether, the elasticity of demand is a critical indicator of a client’s willingness to pay for a product as its price changes. The companies usually focus on low elasticity, meaning that revenues will remain substantial and individuals will continue buying products. The elasticity of demand depends on the existing substitution, promotion, product image, and the target audience’s loyalty. In general, it is a critical measure necessary for analyzing behaviors and predicting future demand and market changes.
Reference
Amacher, R., & Pate, J. (2019). Principles of microeconomics (2nd ed.). Bridgepoint Education.