What Determines Elasticity Of Price In Supply and Demand ?

Price elasticity of demand is the measurement of how sensitive the overall consumer base is to the change in the price of an offering. Price elasticity of supply is in turn the measurement of how sensitive the supply of a product is from a producer based on a change in price. Determining elasticity of a price in the supply and demand of an industry is important because it affects not only a company’s total revenue but their profit as well.

Total revenue is defined as the total amount that a producer receives when they sell a product and is found by multiplying the price the offering was sold at by the total quantity sold. Total revenue is only applicable to testing the elasticity of a price in regards to demand and not supply. Total revenue and price elasticity of demand are directly related and are influenced by a variety of factors. The number of substitute products available, the comparison of consumer income to price, how a consumer views a product (as a luxury or a necessity) and the amount of time for a price adjustment are all examples of factors. If analysis indicates that a change in price and the change in total revenue move in opposite directions, then the demand is elastic. If a decrease in price and a reduction in total revenue or a price increase and a subsequent increase in revenue results, then the demand is inelastic. If there is a price change and total revenue stays the same then unit elasticity exists. Understanding how to manage your pricing to effectively market to the customer requires an understanding of current marketing techniques, and the demand from the customer. Talk to AgencyFusion for additional tips on how you can create an app or another unique marketing promotion to keep your customers informed and interested.

Measuring the price elasticity of supply refers to how producers respond to a change in price by a change in the quantity that they supply. Supply is elastic when the quantity that is supplied by producers responds to a change in price. Supply is said to be inelastic when the quantity that is supplied is not responsible to a change in price. Companies need to monitor the elasticity of supply so that they can reallocate resources effectively in order to cut down on costs and increase profitability. In the short-term (also called ‘short run’) companies can make minor adjustments to their resources such as changing the amount of labor used. In the long-term (also called ‘long run’) companies have more time to make major adjustments such as deciding to shut down or increase/decrease equipment or size. The elasticity of supply can be found by dividing the percentage change in the quantity that is supplied of an offering by the percentage change in the price of the product.