What is the elasticity
Elasticity is a measure of the sensitivity of one variable to changes in another variable. In the field of business and Economics, elasticity means the degree to which individuals, consumers and manufacturers are changing their requirements or the amount received in response to price changes or income. It is used primarily to assess changes in consumer demand as a result of changes in price of good or services.
When the value of elasticity is greater than 1, this suggests that the demand for a product or service depends on the price. A value less than 1 indicates that demand is not price sensitive.
Elasticity is an economic concept used to measure the change in the total quantity demanded for a product or service in relation to the price movement of this product or service. A product is considered elastic if the quantity demanded of the product changes dramatically when its price increases or decreases. Conversely, a product is considered inelastic if the quantity demanded of the product changes very little when the price fluctuates.
For example, insulin is a product that is highly inelastic. For patients with diabetes who need insulin, the demand is so great that the price increase has very little effect on the quantity demanded. The decline in prices does not affect the volume of demand; the majority of those who need insulin, not stretching at a lower price and to make purchases.
On the other side of the equation are highly elastic products. Balloons, for example, is not very elastic, as it is not necessary good, and consumers have just decided to make a purchase if the price is low. Therefore, if the price of balloons increases, the quantity demanded will decrease significantly, and if the price decreases, the quantity demanded will increase.
Elasticity can be calculated by the following formula:
The value of price elasticity in business
Understanding whether or not a product, business or service elastic is an integral part of the success of the company. Companies with high elasticity, ultimately, to compete with other companies on price and must have a high volume of transactions of purchase and sale to remain solvent. Firms that are not elastic, on the other hand, there are products and services that are must-haves and enjoy the luxury setting higher prices.
In addition to price, the elasticity of the goods or services directly affects the retention rate of customers. Businesses often strive to sell products or services that have inelastic demand, this means that customers will remain loyal and continue to buy the product or service even in an environment of rising prices.