Saturday, 30 January 2016

The effect of Price inelasticity on demand to Businesses and Investors

Investment and price inelasticity 
Price inelasticity is very beneficial for businesses and offers firms greater flexibility with price whilst the percentage change in demand it elicits remains more or less the same. For price inelastic goods or services, a percentage change in quantity demanded is minimal with respect to a percentage change in price. A 10% increase in price for instance would lead to a 5% increase in demand. This has great implication for businesses and affects demand and total revenue in two ways: If prices for inelastic goods are lowered, the quantity demanded wouldn’t offset the decrease in price. This would result to less revenue. The firm would then run at a loss and should not really reduce the price of its good. On the other hand, if prices for inelastic goods are increased; although it would lead to a small decrease in quantity demanded, the total revenue will increase.

This means that firms that deal in inelastic goods or services can increase prices, sell a little less but make higher revenue. Therefore, businesses who deal in goods that are price inelastic are better equipped for profit maximization and also more protected against downturns. Price inelasticity, therefore, shows that customers and in extension demands are more tolerant to price changes. Thus, firms that deal in inelastic goods or services can transfer extra cost of production to their customers without adversely affecting the demand. So, price inelasticity gives a better edge at setting up or establishing pricing strategies.

Price inelasticity usually occurs with products that have less close substitutes which means fewer options for customers. Such goods tend to be necessity that people can’t do without. To be able to enhance pricing flexibility and profit maximization, firms can strive to create or deal in more customized or distinctive goods or services. Sophisticated brands or more comfy items also possess greater inelasticity. Thus, many companies that sell distinct, luxury goods make great profit. Firms that deal in more ordinary products, typically, need to reduce price and sell at competitive rates to gain more edge over competing brands.

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