What strategy should be followed when the demand is elastic?

As you know, the income of any company, enterprise and private entrepreneur depends on many factors, but perhaps the most important of them is the sales volume of products sold. Its magnitude largely depends on what the level of revenue and the amount of net profit will be. This factor, in turn, depends on how much demand is elastic, and on the chosen price strategy. On the one hand, the higher the cost of the product, the less it will be bought. On the other hand, at low prices and revenue will be scanty. What price strategy will be best for the businessman? The answer lies in the study of the dynamics of demand.

Elasticity in terms of economy

For the first time this problem was attended by a scientist known to the whole world, as A. Marshall. It was he who introduced the elasticity index, thanks to which it is easy to distinguish when the demand is elastic, and when not, and on this basis choose the most profitable trading strategy. What does this concept mean? Elasticity in economic theory means the ability of some variables to react to changes that have occurred with other quantities on which they directly depend. If we talk about demand, then it primarily affects the selling price.

Calculation of the coefficient of elasticity and plotting

Denote by ΔQ the percentage change in the amount of sales, and by ΔP - the corresponding change in the cost of production. The required coefficient of elasticity is none other than the ratio of these two parameters, taken with the opposite sign: ε _р ^D = - ΔQ / ΔP. In cases where this indicator exceeds one, they say that demand is elastic. When it is less than it, it means the opposite. And if the obtained coefficient turns out to be equal to 1, it is considered that this demand is the demand of a single elasticity. Dependence of sales on prices for clarity is often displayed on the coordinate axes. Usually vertically, an increase in the value of a unit of goods, and horizontally - the amount of revenue. The elastic demand curve is a straight line tilted with its right end down. An example is shown on the left.

Elastic Demand Factors

There are certain reasons that somehow affect the behavior of consumers and the volume of purchases they make. As for the elasticity of demand, we can distinguish the following factors:

1. The amount of income. The smaller it is, the more important is the value of the goods.
2. Time factor. In the long run, demand is usually elastic, and if the offer is valid for a short time, the price goes to the background.
3. Availability of "substitute goods". The more of them, the more important the price plays.
4. The specific weight of this product in the budget of consumers. The higher it is, the more elastic the demand.
5. Quality of products. For luxury goods, as a rule, ε _р ^D > 1, and for items of necessity, usually ε _р ^D <1.
6. Presence of a stock. The more the buyer managed to acquire, the more important the price for him, and, accordingly, the elasticity of demand is higher.
7. Width of product category. In specialized products, demand is less elastic and vice versa.

Choice of trading strategy

When the demand is elastic, the best trading strategy for the firm will be price reduction. Such a policy ultimately maximizes net profit. If the demand is inelastic, then the "cream skimming" strategy is applied, i.e. Increase in the prices of sales of products. When the calculations give a result very close to or equal to one, it means that the entrepreneur should look for other methods of increasing income. Manipulations with prices in this case will not give anything.