Elasticity Of The Price Of Demand

Decent Essays
According to the law of demand if the price increases the quantity demanded of a good or services decreases. The law of supply states that the quantity of production of any goods increases only if the market price of that good increase. These laws have been proposed by the economists in order to measure the changing behavior of both the producers and the consumers. But these laws are not always applicable everywhere as there can be various other factors controlling the demand and the supply. Thus another quantitative measurement was introduced to explain more vividly the market behavior of the customers as well as the producers. This is known as elasticity. As the price of a product changes so does the demand changes…show more content…
Thus to anticipate the marginal revenue the company should use the price elasticity which the basic factor in deciding the correct price. This sort of an economic analysis utilizes a particular mathematical formula to delineate the theoretical and ideal relation between the marginal revenue and the elasticity To set the correct pricing policies all the companies could use the price elasticity of demand for their products. The optimal pricing policy would help the company to increase their profit and allows that the prices of the goods be in synchronization with the market. The managers should focus on the numerous factors affecting the elasticity so that they can establish the correct price some of which are as follows. • Availability of close substitutes The availability of close substitutes is one of the basic factors. The best way would be to cut down the price if the product or the service has too many competitors for instance a gas station. If in your station per gallon costs $3.50 and the station across the road costs $3.20 you would lose many customers to them which in turn would decrease the profit margin of your company. • Product. The elasticity is affected by the characteristics of the product itself. The customers are willing to pay a higher price for a product only if it has got some unique quality. For instance a diamond ring with a particular kind
Get Access