Price elasticity of demand and its relevance to pricing decision
...a cheaper brand. Price elasticity figure can explain the effect the price raise is likely to have on demand. So therefore it’s very important for a business to workout how the price change will affect and whether your product is very sensitive because some product are far more price sensitive than others. For example, when the price of gasoline rises by 1% the quantity demanded falls by 0.2%, so gasoline demand is not very price sensitive. Price elasticity of demand is -0.2 When the price of gold jewellery rises by 1% the quantity demanded falls by 2.6%, so jewellery demand is very price sensitive. Price elasticity of demand is -2.6 Price elasticity measures the percentage effect on demand of each 1% change in price. So if the price of gasoline rises by 1% and demand falls by 0.2%, the price elasticity would be 0.2. -0.2% = -0.2 1% You should also note that price elasticity of demand is always negative because price down pushes demand up and price up pushes demand down. How the price elasticity of demand is affecting the washing powder Each organization is in a different product-market and for each organization the stakeholders may respond differently to a particular management strategy. The sales turnover is an important source of cash flow internally within the organization’s daily operating expenses but externally, sales turnover and in particular the growth in sales may signal a low risk-class in the product market, that is, a successful product. At the same time the organization is eager to increase the profit by raising the price. Have a look on the information provided from last year. Price Sales [millions packets] £2 600 £3 540 With this information we can see clearly that sales turnover is gone down after they had increased the price. The product market is a complex web of consumer- stakeholder decision making which management has to untangle in order to establish market share and finally improve the success of the organization. ...