Price Elastic Products – Are There any benefits?

Readers Question: When would you want to own a business that sells price-elastic products? Why?

Price elastic products mean that if there is an increase in price, there will be a bigger % fall in demand. Therefore, with elastic goods, there is little incentive to increase price because there will be a bigger % fall in demand. Elastic products suggest the good is in a competitive market and therefore it is more difficult to make profits. If demand was price inelastic a firm could put up prices  and make profits, for example, a firm with monopoly power is likely to have inelastic demand.

When Price Elastic products are Beneficial

1. For a Sales Maximising Firm.

If a firm wishes to increase market share and increase its sales then  price elastic means that cuts in price will beneficial in increasing sales.

  • However, it depends on how other firms react. If one firm cuts its price, demand may be elastic, but if all the other firms follow suit demand is likely to be inelastic and the price war only causes a small increase in sales (see Oligopoly Kinked demand curve)

2. Economies of Scale

If a firm is producing a good with economies of scale. Cutting prices will enable lower average costs because output can increase, this could even increase profitability.

3. Elasticity is not the Most Important Factor in Determining Profitability.

Having inelastic demand goods (e.g. trains) doesn’t make a firm profitable. Similarly having price elastic good doesn’t mean you are unprofitable. The key is whether Revenue is Greater than Costs. For example, confectionery is quite elastic, there are many different types to choose from; but the market is still quite profitable.

Note demand for chocolate is inelastic. but demand for individual bars is price elastic.

Cigarettes have very inelastic demand, but, individual brands are still elastic because there is choice for consumers.

Most goods have an elastic demand, unless there is a pure monopoly.

Related

19 Responses to Price Elastic Products – Are There any benefits?

  1. Kim March 20, 2008 at 11:39 pm #

    Thanks, that helped quite a bit.

  2. Eileen March 22, 2008 at 11:23 am #

    OK, I have a question for you. This was the example which popped to mind as I was reading your entry.

    Here in my Middle Eastern country, sheep are sold for meat. Each year, prior to the Festival of the Sacrifice (Muslim holiday where every family buys a sheep to butcher at home in the house), families go shopping for their sheep. In the weeks prior to the Festival, the price of sheep goes UP, UP, UP. Sometimes the prices seem to reach scandalous levels. Of course, after the Festival, the price falls back to normal.

    It appears that according to your explanation, this would be a PRICE INELASTIC good. However, this is NOT a monopoly, as there are MANY, MANY sellers of sheep in the market-place. It looks more like a collusion of price-fixing among the many sellers, to me.

    What do you think about this?

    Eileen
    Dedicated Elementary Teacher Overseas (in the Middle East)
    elementaryteacher.wordpress.com

  3. Enrique Serrano March 22, 2008 at 1:39 pm #

    Thanks for writing on this topic. I am anew student in economics and I was gathering information about this topic. You really did a great job answering my question. What other people would do without your kind help? We need people like you in this world, not only for helping others to accomplish their needs, but with knowledge, to guide America where it needs to go.
    Thanks so much, God bless you!

  4. Than Win January 11, 2009 at 6:22 am #

    affordable ( lower value) items are more price sensitive than the valuable items such as gold and jewellery. A wife spent more bargaining time at vegi shop than at the goldsmith ?

  5. Nishta April 8, 2009 at 7:57 am #

    a business sells a product whose demand is relatively price inelastic. what is the effect on sales and revenue of a price increase?

  6. Dr. Judy Edwards May 18, 2009 at 9:13 pm #

    Did you know that students are asking you to answer their essay questions for them instead of doing the research on their own? This is unethical on their part and I’m sure a bit of a surprise to you.

  7. John B July 15, 2009 at 2:33 am #

    Well Dr.Judy ,
    Students may be researching questions they have about this topic but did it ever occur to you that we as students know we cannot copy this material or it will be plajurism. Do you think we are that stupid ? Amazing that you have reached Doctorate status thinking people would open themself up to this.
    Thank you for the information. You helped clear some gray areas for me !

  8. zgeni July 20, 2009 at 1:55 am #

    Judy I can relate to your statement, but as an economic student the fact that someone asked the question to see what others may think or have to share on the topic is also considered a form of research. Perhaps the answer received is one that prompted the student to think at greater depths as it did for me. No I won’t write without giving credit where credit is due.

  9. zgeni July 20, 2009 at 1:56 am #

    Thanks John B.

  10. Wojciech Paciorek July 21, 2009 at 7:42 am #

    Hey,

    I am a student of ECON312 in DeVry University Online. I would like to hear from your feedback and sharing comment. I am going to copy my research paper with that question. Yes, I know some students are doing illegally to copy and paste without LEARNING. I always put the citation or APA format to allow Professor knows what I found. I added my own words as 100 words minium.

    Thank you…

    Enjoy my work below:

    Assignment: Week 2

    Question: When would you want to own a business that sells price elastic products? Why?
    Write your individual answer to the question listed above minimum 100 words in APA style, using correct economic terms covered in the discussions. You must use at least one article. Note: The textbook is not an article and cannot be the ONLY source for the assignments. Use the DeVry Library as a resource for finding your references.

    I would like to discuss shortly about the Price Elastic. I found the good source for my research and study someone’s work to help me to understand the difference. Give me wisdom to write about my America Dream of Opening Business.
    Price elastic products mean that an increase in price will cause a bigger percent fall in demand. Therefore, presumably they offer less scope for increasing price. Elastic products suggest the good is in a competitive market and therefore it is more difficult to make profits. If demand was price inelastic a firm could put up prices and make profits. This is the case of monopoly (2008).

    My America Dream of Opening Business-Cafe
    I have a dream to open the small Café for the deaf community. It also welcomes the hearing community. However, I have to order the finest beans from Columbia. I order the 10 pounds of coffee for twenty dollars of “Columbia Coffee”. It would be cheaper for me to pay. I sell it for higher price as more profit. However, I prefer inferior goods because of the cheapest thing for me to order and import the Columbia coffee. Thereof, I would increase the price as same as Starbucks because none of the customers would know that coffee beans are from the frozen (inferior goods) or fresh (normal goods). Finally, it is depending on how many customers to buy the coffee. If more customers as order more coffee beans (pounds) are very important for the economic business better. Prices VS Quantity is very important to know which they can be elastic or inelastic demands. If I put the coffee cups, a higher price to sell as called an inelastic demand. It may be profitable or not. If I put a standard price for that coffee cups, it would be elastic demand that many customers buy as more quantity to order the inferior goods (cheap) cost for me as a businessperson.
    Thank you…

    Reference:
    (2008, March 20). Price Elastic Products – Are There any benefits? Retrieved July 21, 2009, from Economics Help Web site: http://www.economicshelp.org/blog/business/price-elastic/

  11. Michael Zimmerman September 14, 2009 at 3:26 am #

    Judy Edwards – You know, I actually have this exact question as an essay in my Economics homework. In all fairness, I will end up citing this work, as it is the only information I’ve found outside of our text about this topic (and we have an extensive academic full-text search available through the online library). I definitely suggest anyone thinking of using this as an “answer” actually read their text and understand the concepts being discussed here, however, as the broken English used makes the information practically useless unless you already understand it or are planning to copy and paste. Those planning to copy and paste should also be prepared to fail the assignment for being unable to write complete sentences and to be expelled for plagiarism.

  12. fifi October 30, 2009 at 8:56 am #

    can u Tell me the difference between elastic and inelastic demand.
    what is the difference between these two things?
    which products are elastic and which are inelastic ?give examples from our every day life.

  13. naina April 19, 2010 at 7:11 am #

    what is example of
    1. perfectly elastic of demand
    2. perfectly inelastic of demand
    3. relatively inelastic demand
    4.relatiely elastic demand

  14. vikash jain May 18, 2010 at 12:30 pm #

    i want to know what are the 10 commodities which are highly elastic .and thier reasons

  15. shirin June 20, 2010 at 9:48 am #

    can i get the exact name of 10 elastic items please!!!!
    I need it Urgent……………

  16. pasi patrick August 29, 2010 at 11:56 pm #

    i appreciate your explanning on price elastic products however what methods can i employ to market price elastic products

  17. Gloria September 6, 2010 at 6:53 am #

    I have a question. Is there a purely elactic market? If so what is it?

  18. tanu agarwal May 18, 2011 at 1:35 pm #

    i hv a question . why different have different elasticity of demand? in detail.

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