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Price-Elastic Products - Essay Example

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Price elastic products are those whose rise in price will cause a remarkable decrease in demand. A product becomes price elastic when there is a severe competitive market. In other words, when oligopoly exists in the market then scope for increasing price of the product is very less…
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Running head: PRICE-ELASTIC PRODUCTS PRICE-ELASTIC PRODUCTS INTRODUCTION Price elastic products are those whose rise in price willcause a remarkable decrease in demand. A product becomes price elastic when there is a severe competitive market. In other words, when oligopoly exists in the market then scope for increasing price of the product is very less. This is just the opposite as in the case of monopoly, where a firm could put up prices and make profits. Having price elastic good doesn't mean you are unprofitable (e.g. electronic goods). Similarly, having inelastic demand goods doesn't make a firm profitable always. The key is whether revenue is greater than costs. (Investopedia, 2003)
MAXIMIZING SALES THROUGH PRICE ELASTICITY:
I would select price elastic products mainly to increase market share and increase the sales of the product. As the price of a product rises, consumers will usually demand a lower quantity of that good, perhaps by consuming less, substituting other goods, and so on. Conversely, as the price of a good falls, consumers will usually demand a greater quantity of that good, by consuming more, dropping substitutes, and so forth.
Consider the example of cell phone market. It is one of the best examples of price elastic products. We can see lots and lots of new cell phone models flooding the markets from different makers. There is no possibility of increasing the price of cell phone due to high competition. On the other hand, more advanced cell phone models with significantly advanced features come at a very low cost. In fact, the cost of the cell phones is a constant decreasing curve. A slight increase in the cell phone leads to a great decline in the market demand.
COMPARISON BETWEEN ELASTIC AND INELASTIC PRODUCTS:
Fig.1.1 Graph of Price vs Qty. demanded for (a) inelastic and (b) elastic goods
(Jason Welker, 2008)
The amount of change in demand corresponding to change in price for price-elastic as well as price-inelastic products can be well understood with the help of these graphs (Fig.1.1).
Consider a price-inelastic product (e.g. Petrol). When the price is raised from P2 to P1, the amount of change in demand (Q2-Q1) is very small compared to price rise (P1-P2). This is the case of monopoly.
Now, consider a price-elastic product (e.g.). The competition for market share is very high in this case. So, a small rise in price (P1-P2) may lead to a considerable decline in demand (Q2-Q1). The vice-versa is also true. It means that when a firm decreases its price from P1 to P2, there is a significant increase in demand and hence the market share. This is the main reason for the reduction in the prices of electronic goods and other price-elastic products.
REFERENCES
Economics Basics: Elasticity, 2003. Investopedia. Retrieved 14 May 2008 from http://www.investopedia.com/university/economics/economics4.asp
Janson welker, 2008. Price Elasticity of Demand. Welker's Wikinomics. Retrieved 14 May 2008, from http://welkerswikinomics.wetpaint.com/page/Price+Elasticity+of+Demand Read More
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