Pricing is a very critical element of the marketing mix. The price of the product or service earns revenue for the company.
One of the important external factors that influence the price of any product or service is its demand. The relationship between price and demand varies from product to product and market to market and one of the important measures used by business organizations to understand the relationship between the price and demand for their product or service is the price elasticity of demand. Price elasticity of demand indicates the sensitivity of demand to price changes. It helps measure the impact of change in the price of a product on its demand.
The demand is said to be elastic when there is a significant change in demand for a product when there is a small change in its price. However the demand for a product or service is said to be inelastic if there is no change in demand even when there is a significant change in its price. A product will have an inelastic demand when the total expenditure of the consumers on the given product forms an insignificant percentage of their total income. For example reasonable increase or decrease in the price of Sunkist oranges will not have an impact on its demand for an average American family.
The demand for a product will also be inelastic when substitutes for the product are not easily available to the consumers and also when they cannot easily compare the quality of the substitutes. In case of such products and services the consumes are less price sensitive. When a product is unique or is of very high quality, or is very exclusive or is very prestigious to own then such product will have an inelastic demand as consumers buying such products are not price sensitive. For example customers buying a Rolls Royce will not be price sensitive and any increase in its price will not impact its demand.
ReferencesKotler, Philip. & Armstrong, Gary. 2006. Principles of marketing, London: Pearson EducationInc.
