Elasticity is a measure of how much a certain quantity changes in response to a change in another quantity. In economics, elasticity is used to measure how responsive one economic variable is to changes in another. It can be used to measure the impact of price changes on demand or the impact of income changes on consumption. Elasticity can be measured using different units of measurement, including percentage points, absolute values, and logarithmic differences. The most common form of elasticity that is used is the price elasticity of demand, which measures how much the quantity demanded changes in response to a change in the price of that good. The concept of elasticity informs strategic choices related to pricing, production, advertising, and promotion in companies.
The concept of elasticity informs strategic choices related to pricing. Elasticity refers to how much demand for a good or service changes in response to price changes. If demand is elastic, then a small change in price can result in a large change in demand. If demand is inelastic, then a small change in price will not have much of an impact on demand (Zhang et al., 2019). Elasticity is an important concept for businesses because it can help inform strategic decisions related to pricing. For example, if demand for a good or service is elastic, then businesses may want to keep prices low in order to increase demand. In contrast, if demand is inelastic, businesses may want to raise prices in order to increase profits.
On the other hand, the elasticity concept also informs production-related decisions. Elasticity is the responsiveness of one variable to changes in another. In the business world, there are three types of elasticity that are particularly important: price elasticity of demand, price elasticity of supply, and income elasticity of demand. Price elasticity of demand measures how consumers respond to changes in prices (Gilroy et al., 2020). If a company raises prices and sales stay the same or even increase, then the company’s products have relatively inelastic demand, and it can raise prices with impunity. However, if a company raises prices and sales decline as a result, then its products have relatively elastic demand, and it will likely lose customers and market share if it continues to raise prices. A company may choose to produce more of a good or service if it knows that there is high demand for that good or service.
Elasticity concept aids companies in making advertising and promotions decisions. The concept of elasticity is incredibly important for companies when making advertising decisions. This is because elasticity refers to how much demand for a good or service changes in relation to price changes (Zhang et al., 2019). In other words, it alerts the company how sensitive consumers are to price changes. If demand is perfectly inelastic or unresponsive to price changes, then a company can charge any price they want, and consumers will have to pay it. On the other hand, if demand is perfectly elastic or responsive to price changes, then the company will have to lower their prices significantly if they want people to buy their product. Regarding promotion, the company can create more sales by reducing the prices for elastic products. Additionally, the organization can adopt the system of price increment to register high profit in the case of inelastic products.
In conclusion, the elasticity concept is essential to companies when it comes to deciding on production, advertising and promotion, and pricing. On pricing, the elastic demand may raise the product demand by reducing prices, while for inelastic, the company may decide to increase profit by increasing prices. Concerning production, when an organization speculates high demand, then they produce more products. On advertising and promotion, when there is perfectly inelastic demand, then the firm can quote any profit and still make more sales. Conversely, when it is perfectly elastic, then the company will have to lower its prices to attract more buyers.
Gilroy, S. P., Kaplan, B. A., & Reed, D. D. (2020). Interpretation (s) of elasticity in operant demand. Journal of the Experimental Analysis of Behavior, 114(1), 106-115.
Zhang, T., Huo, Y., Zhang, X., & Shuai, J. (2019). Endogenous third-degree price discrimination in Hotelling model with elastic demand. Journal of Economics, 127(2), 125-145.