Why do managers need to know about elasticity of demand?
Price elasticity of demand refers to the relationship between the price of a product and the quantity of the product that is demanded by consumers.
A product's demand is said to be elastic if, when the price goes up, revenues go down. If the price goes up and revenues go up, then demand is inelastic.
For a manager, this is very important information. If a manager knows the elasticity of the demand for his firm's product, he will be able to know whether to raise or lower prices. This is surely a very important decision for any manager to make.
In fact, a manager must take into account the factors that influence the demand of a product to be more or less elastic.
For example, the type of needs satisfied by the product can influence the demand. If the product is of first necessity,the demand is inelastic, the product being bought, whatever the price. In return, if the product is luxury, the demand will be elastic, and if the price will increase slightly, more consumers would be able not to purchase it anymore.
Also, if there are substitute products on market, their demand will be very elastic. For example, a small increase in price of olive oil can cause to a large number of women to decide to use sunflower oil, instead of olive oil.
Another factor that may influence the elasticity of demand is asset's importance, in terms of cost. If the expenditure on that asset requires a very small percentage of their income, their demand will be inelastic. For example,the pencil. Variations in it's price influence very little the consumer decision of buying it.
But it should be mentioned that there are different classes of elasticity. Phenomenon we've analyzed and called "elasticity" we should have been called "elasticity-price" , because it is trying to measure the sensitivity of demand to price changes.
Of course, demand may also be more or less sensitive to other factors and a manager is there to be able to identify and to assess,at first,all factors that will influence the demand.
Elasticity of demand, which is also called price elasticity of demand, refers to the extent of change in price of a product demanded by buyers in response to the change in its prices. It is measured as percentage change in quantity of a product demanded divided by percentage change in the price of the product.
Price elasticity helps managers to understand how changes in price of a product will impact the total sales of the product. This insight helps the managers to determine the prices of different products that will yield maximum profit for their businesses.
Price elasticity of demand can also be used for design of other marketing policies and strategies. For example, levels of price elasticity of demand can be used as a basis of market segment and then devising marketing mix for each segment according separately. For example , most of the airlines find that business travellers have relatively price inelastic demand, while tourist have hire price elastic demand. Airlines take advantage of these differences by offering a stable and high price to business travellers with additional facilities like incentives for total business volume and better service. In contrast they offer low prices to tourist who are able to plan their holidays well in advance. Also there is a third segment comprising of customers ready to travel on holidays at very short notice provided they are offered very low prices. This third segment is used to fill up seats in air crafts which remain unsold to the other two segments till very close to the flight time. This enables airlines to get some revenue, against spare capacity, which would have otherwise been totally wasted.