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Introduction
The work of any company critically depends on its ability to analyze the market and its target audience. The fact is that the modern business environment is a complex phenomenon impacted by numerous factors. It also means that companies have to work in a highly changeable environment as altering one aspect will promote the corresponding shift in others. In such a way, successful goal achievement depends on the ability to track these changes, forecast them, and introduce appropriate responses. Thus, demand is one of the central aspects of any company’s work as it shows the degree to which a particular product is needed. Under these conditions, the elasticity of demand acquires the top priority.
Background
The company’s development is linked to its ability to cooperate with the target audience and predict changes within this entity. Under these conditions, demand becomes one of the central factors that should be analyzed. It can be determined as the amount of products or services that can be bought by clients at any price level (Rothaermel, 2021). In such a way, it is linked to the quality of the product, costs, and the trends prevalent in society. The high demand might allow firms to increase the price, while its reduction might also promote the reconsideration of the current pricing strategy (Aaker and Moorman, 2017). For this reason, the constant measurement of the factor and its monitoring is critical for companies.
Price Elasticity of Demand Definition
The price elasticity of demand becomes the term outlining the correlation between the two major factors mentioned above. It can be determined as a measurement of the product’s consumption change regarding a corresponding price change (Rothaermel, 2021). For business analysts, it is a crucial determinant promoting a better understanding of the supply and demand trends linked to the product change (Karatajaya, Kotler and Setiawan, 2016). The correct understanding of the given factor also leads to improved strategic planning and cooperation with the target audience (Meyer, Kauermann and Smith, 2022). At the same time, it requires the monitoring of the market and available products as price elasticity depends on the overall supply, demand, and interest in a particular product. At the same time, there are three major types such as elastic, inelastic, and unitary (Rothaermel, 2021). Their understanding is fundamental for the modern business world.
Elastic Demand
The elastic demand is the first type that should be considered when analyzing the existing business environment. It implies that customers focused on buying a particular product are highly responsive to price and prefer to look for better and more cost-effective options (Karatajaya, Kotler and Setiawan, 2016). It is explained by the presence of numerous substitutes that can be used instead of the proposed item, low switching costs, or the unnecessary nature of the product (Marshall and Johnston, 2021). Additionally, if services are homogenous, clients might also respond to the changes in price and start looking for a better option. As a result, high price elasticity of demand is observed and should be considered.
The concept of elastic demand can be explained by using real-life examples. For instance, food products, such as bread or onion, can be characterized using the term. First, many providers offer these nutrients to individuals, meaning that clients benefit from many substitutes and can use them if the price rises (Kothe, 2019). Second, these are not unique products, and the market has multiple offerings of the same quality and quantity. As a result, clients might respond to the higher price and look for substitutes, addressing other firms. For this reason, the elastic demand for bread and onion comes from the existence of numerous similar products in the market and their low costs.
There are also some examples of services that might also have a high price elasticity of demand. For instance, transportation companies provide clients with numerous offerings to deliver them to various destination points. However, the current level of globalization resulted in the emergence of numerous carriers ready to offer various transportation services. As a result, if one firm introduces a higher product price, clients might start looking for new opportunities and cooperate with other carriers as it would be more beneficial for them. In such a way, a high number of substitutes influences the price elasticity of demand and should be considered by companies when planning their future activities.
Inelastic Demand
Inelastic demand is another aspect that affects the work of companies and the market. It is observed when the target audience is unreactive to changes in price and is ready to continue buying a specific product even if the costs increase (Karatajaya, Kotler and Setiawan, 2016). It is linked to several factors, such as the limited number of substitute goods, their unique nature, or the necessity to acquire an offering possessing specific features (Rothaermel, 2021). Inelastic demand might also emerge as the result of seasonal changes in products and services provided to clients (Aaker and Moorman, 2017). Under these conditions, it remains a critical factor influencing the market, and the companies’ work as their strategies should consider this feature.
The inelastic demand can be demonstrated by using specific examples. For instance, petrol is the product that stably remains required by consumers. The last years have been characterized by the constantly increasing price for it because of numerous global factors. However, the demand for it remains high, and individuals are ready to pay for it. It is explained by the impossibility of replacing it with other products and the growing number of individuals who have cars. As a result, the demand remains inelastic, and the growing prices do not make individuals reconsider their preferences and buying behaviors. Furthermore, in the nearest future, the tendency will preserve as there are no substitutes of the same effectiveness.
There are also some services characterized by the inelastic price demand. For instance, statistics show that healthcare service prices continue to grow yearly (Kjeld et al., 2021). However, clients still use them as they guarantee a high quality of life and help to recover from diseases. It proves the idea that services that cannot be substituted and are critical for the population remain required regardless of the changes in price and other social conditions (Iacobucci, 2021). Access to such offerings is crucial for all groups, and they focus on trying to generate a sufficient amount of money to afford them. For this reason, the sphere is attractive for private companies offering this type of service. They might benefit from the stably high revenue.
Unitary Demand
Finally, unitary elastic demand is another important feature that companies should consider. It can be determined as the type of demand changing in the same proportion to its price (Iacobucci, 2021). In other words, the alteration in demand equals price and helps to forecast the future development of specific trends (Vives and Jacob, 2020). The product elasticity remains negative, meaning that a price reduction is not associated with the generation of additional income (Chen, 2017). This type of demand depends on the recent economic changes, technological advances, and the clients’ requirements for specific products. At the same time, it is hard to predict the given trend as it remains non-linear and extremely changeable (Iacobucci, 2021). However, it is vital to consider this factor when planning business activities.
The recent changes in the price of electronic products can be viewed as an example of unitary demand. Initially, items such as smartphones were extremely expensive, and most clients were not interested in their acquisition. However, the technological advances made them more available to various population groups. It resulted in the reduced price and the increased demand at the same time. For companies working in the sphere, it means that it is vital to consider this trend to avoid overspending and investing in technologies that might become cheaper in the future.
Specific services might also be linked to this aspect. For instance, cosmetic surgeries were initially viewed as rare and extremely expansive procedures with limited demand. However, the development of the healthcare sector, new methods, reduced risks, and reasonable prices made such offerings more popular. As a result, more individuals became interested in such services. It demonstrates how the current processes in the market impact the clients’ behaviors and their readiness to buy a certain offering. At the same time, it improves decision-making in the business sphere and promotes better results.
Conclusion
In such a way, the price elasticity of demand is an essential factor impacting the functioning of the modern business world. It indicates the correlation between the product’s consumption and its price. Resting on this type of data, it is possible to plan specific activities and forecast the possibility of generating revenue by interacting with clients and providing them with items and services they need at the moment. The price elasticity of demand depends on the existence of substitutes, the nature of the offering, its necessity, and the current level of social and technological evolution. Its correct understanding might help to generate competitive advantage and hold leading positions.
Reference List
Aaker, D. and Moorman, C. (2017) Strategic market management. 11 edn. New York, NY: Wiley.
Chen, X. (2017) ‘Elasticity as relative slopes: a graphical approach to linking the concepts of elasticity and slope’, The American Economist, 62(2), pp. 258–267.
Iacobucci, D. (2021) Marketing management. 6th edn. Thousand Oaks, CA: Cengage Learning.
Kjeld, S. G. et al. (2021) ‘Price elasticity of demand for cigarettes among youths in high-income countries: a systematic review’, Scandinavian Journal of Public Health.
Karatajaya, H., Kotler, P. and Setiawan, I. (2016) Marketing 4.0: moving from traditional to digital. New York, NY: Wiley.
Kothe, S. K. (2019) ‘Price and income elasticity of demand for services in India: a macro analysis’, The Indian Economic Journal, 67(3–4), pp. 334–349.
Marshall, G. and Johnston, M. (2021) ISE marketing management. 3rd edn. New York, NY: McGraw Hill Education.
Meyer, J. F., Kauermann, G. and Smith, M. S. (2022) ‘Interpretable modelling of retail demand and price elasticity for passenger flights using booking data’, Statistical Modelling.
Rothaermel, F. (2021) ISE strategic management: concepts. 5th edn. Mc Graw-Hill Education.
Vives, A. and Jacob, M. (2020) ‘Dynamic pricing for online hotel demand: the case of resort hotels in Majorca’, Journal of Vacation Marketing, 26(2), pp. 268–283.
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