Price Elasticity
Introduction
In the highly globalised markets of today, firms actually coax their consumers to show their high demands for a certain product of that firm (O’Sullivan, A., Perez, S., & Sheffrin, S. 2006). When a customer does name his price, however, is very close to a demand curve. But what is Price Elasticity of Demand? This describes the relationship between the changes in the demands for the product and the changes in the price of the product.
The price is inversely related to the quantity demanded, ceteris paribus (Case, Karl E. & Fair, Ray C. 1999). However, given any change in price our demand does not change constantly and at the same percentage change of the price. Thus we may say that the price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price. Usually, our basic needs are considered inelastic while luxury goods are considered elastic. Basic goods have inelastic demand because we cannot easily shift from one good to another or give up them. This is because these goods are necessities. On the other hand, luxury products are considered products that show elastic demand because the change in price resulted more than proportionate change in quantity demanded. Luxury goods have elastic demand because we can shift from one good to another if the price is no longer reasonable. We can even give it up if the price is very high. For this paper, let’s consider the determinants of price elasticity/inelasticity of Will Bury’s digital books.
Discussion
In the given case of Will Bury, it shows that there are elastic goods that can compete to his invention or his planned business, the audio-type digital books. And this factor could affect his product distribution. And since there are now numerous substitutes, Will Bury should carefully access it. Let say, when the price of his products increased by almost half than its usual prices, the consumers/customers may immediately consider other digital book products in which price is much is lower e.g. non-audio digital book files. Thus with this, we may say that the price of the good in relation to our spending capabilities is a determinant. It can be argued that goods that account for a large fraction of disposable income have a propensity to be elastic.
Apparently, we as consumers often consider other substitutes of digital books. Thus we may say that the number of substitutes is a determinant. So instead of buying the possible expensive audio-typed digital books from Will Bury, we tend to go to their substitutes such as non-audio digital book files or if we really prefer audio files we may just prefer to buy music CDs or DVDs. This means that the larger the number of close substitutes for the good then it is easier for us to shift to alternative goods if the price increases. Usually, the larger the number of close substitutes, the more elastic the price elasticity of demand.
Moreover, Will Bury may also consider that the degree of necessity is also determinant factor of its elasticity (Mas-Colell, A, Winston, MD & Green. JR 1995). It means that if we, the consumers feel that we don’t really need to buy digital type of books even the price of it is low, we tend to choose other products. Basically, the higher necessity items have little change in demand despite changes in price. Because they are “necessary” to survival, happiness, etc. people become willing to purchase them even when price changes occur. The following figure shows the perfect elastic demand.
Figure 1
On the other hand, the next figure shows perfect inelastic demand.
Figure 2
As seen in the above discussion, Will Bury need to consider the demand of consumer to digital books. As seen in the presentation, it shows how responsive the demand is in accordance to the movement or change in price. And this is what we call elasticity (McCracken 1986). The price elasticity of demand can be computed by this averaging formula (Case, Karl & Fair 1999) which is needed by Will Bury:
Where: epd = price elasticity of demand
= new quantity demanded
= old quantity demanded
= new price
= old price
Using this formula, Will Bury may compute the price elasticity of his product. There are some instances that negative values will occur but this is only represents the inverse relationship between the price and the quantity demanded. And we just only need to get its absolute value. If epd is greater than 1, it is elastic and if less than 1, it is inelastic. The total revenue is the product of the price and quantity. This is the money of the seller’s hand at the end of the day. However, it is not yet his profit because he has not yet deducted the cost. But if Will Bury found out that his products is inelastic, then he will possibly have a successful business because inelastic product simply means that his consumer cannot easily shift from his good to another. For Will Bury to be successful, he needs to carefully access the determinants of price elasticity of demand.
References:
Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.
Mas-Colell, A, Winston, MD & Green. JR (1995). Microeconomic Theory. Oxford University Press, New York,
McCracken, G. ( 1986 ). “Culture and consumption: A theoretical account of the structure and movement of the cultural meaning of consumer goods”. Journal of Consumer Research, 13, 71-84.
O’Sullivan, A., Perez, S., & Sheffrin, S. (2006). Economics: Principles, Applications, and Tools (5th Edition). Alexandria, VA: Prentice Hall.
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