Marketing- Understanding Markets And Customers Flashcards
What is price elasticity of demand?
This measures the extent to which a change in price affects demand I.e how sensitive demand is to a price change
-PED us concerned with the size of the change of demand rather than the direction of change in demand
What is the relationship between price and demand?
-inverse relationship- negative correlation as price goes up demand goes down
What is the PED equation?
PED= % change in quantity demanded/ % change in price
What is price elasticity demand?
-price elastic demand is where a percentage change in price causes a larger percentage change in demand
-it’s PED value is always greater than one ignoring the sign so below -1 or above 1
What is price inelastic demand?
-price inelastic demand means a percentage change in price causes a smaller percentage change in demand
-The PED value is less than one ignoring the sign so greater that -1 or less than 1
What factors affect PED?
-availability of substitutes
-level of necessity
-brand loyalty
-proportion of income spent on a good - if it is a small proportion a change in price has little change on demand as consumers can still afford it
-time - longer the time the longer consumers have to adjust their buying habits so more price elastic over time
What happens to revenue when price is increased for a price elastic demand product?
- if price increases demand will fall by a larger extent so the fall in demand outweighs the rise in price so revenue falls
What happens to revenue when you increase the price for a price inelastic demand product?
-if price increases demand decreases by a smaller amount do the price increase outweighs the falling demand so revenue rises
What should be done to price for a price elastic product to increase revenue?
-decrease price to increase revenue
What should be done to the price of a price inelastic product to increase revenue?
Increase price to increase revenue
What did Disney do to price?
- they wanted to reduce overcrowding on most popular rides so they increased ticket price in the US by 4% but demand only fell by 1 to 2 % as it was price inelastic demand so it didn’t work
What did Netflix do to price during the pandemic?
-in pandemic 16 million consumers were added in the first three months of 2020 alone so on jan 21 Netflix increased price to reflect the amount of money spent on content assuming demand was price inelastic but considering the number of competitors was it really ?
How is price elasticity of demand used?
-sales forecasting: a firm can ratings the effect on demand of a price change. once a sales forecasting has been produced the firm can then make decisions about production, personnel and purchasing
-price strategy: price can be changed to help maximise revenue and therefore profit based on knowledge about the PED
What are problems with measuring PED?
- the firm can calculate what PED has been by using past data but that doesn’t mean PED is still the same now as competition levels may have changed along with consumers tastes
- The PED is likely the change over a products life cycle. it is likely to be very price elastic as the start as consumers are wary of the new product and become more inelastic in the growth and maturity stage and then more price elastic when in decline when consumers only buy it if the price is attractive
What are strategies to reduce the PED?
-increase product differentiation
-increase brand loyalty so that consumers perceive there to be less substitutes
-integration- if a firm takes over a rival then it’s reducing the number of substitutes a good has, reducing the PED
-predatory pricing is illegal but could be used hypothetically to push out competitors by having a loss making price until they are eliminated
-price fixing- also illegal but it is when firms in an industry may form a cartel ie they act as a monopolist rather than many firms so they agree on a similar price so there a few substitutes to choose from
Why do firms want to make demand price inelastic?
-if a firm faces higher costs then profit margins will be reduced so in order to maintain profit margins firms can increase the selling price of the product. However, they would only want to do this is demand is price inelastic. If demand is price elastic there is pressure to reduce prices, which reduces profit margins
