Every firm wants to either retain or increase demand for its commodities. Let’s analyze the determinants of price elasticity of demand. A higher elasticity means a higher sensitivity of demand to changes in price. The factors that affect demand include the following.
Availability of substitutes. When there exist substitutes to the item in question, a rise in price may lead consumers to substitute the item with another which is cheaper and serves the same purpose. For example, if a hotel manager decides to increase the meal price for a hotel in a city center, the demand for the hotel meals will go down as customers will choose to eat in the other hotels. This scenario will however not be the case for a hotel in a town with one or two hotels as there will be no available substitute meals (Anderson, 1997).
Importance of goods within consumers’ budgets. Necessities such as salt are price inelastic. On the other hand, electronic appliances and automobiles require a substantial amount of the total consumer’s disposable income and therefore price elastic. A company needs to consider the importance of goods to consumers before changing prices. Also, a company needs to review its power in the market. For example, if the company is a monopoly, then it can decide to increase or decrease prices as the demand for monopolized goods is perfectly inelastic to price changes (Gallo, 2015).
The degree of brand loyalty. If consumers choose to buy a product whether or not its price is changed, the product is said to enjoy brand loyalty (Sanoa, 2014). A company will need to establish brand loyalty given past experiences with a price increase in a particular brand. For example, Milk products in the U.S. are price inelastic, and management team for such milk companies can increase or decrease prices when it is deemed reasonable.
Length of the period to which the demand curve pertains. Demand is more responsive to price changes in the long run than in the short run (Seo, 1984).
References
Anderson, P. (1997, November 13). Price Elasticity of Demand. Retrieved from Harvard University: https://scholar.harvard.edu/files/alada/files/price_elasticity_of_demand_handout.pdf
Gallo, A. (2015, August 21). A Refresher on Price Elasticity. Extracted from Harvard Business Review: https://hbr.org/2015/08/a-refresher-on-price-elasticity
Sanoa, N. (2014). Evaluation of price elasticity and brand loyalty in milk products. Elsevier, 1482 – 1487.
Seo, K. (1984). Managerial Economics: Text, Problems, and Short Cases. Minnesota: R.D. Irwin, 1984.
