What Does Elasticity Mean in a Company?
Elasticity is responsiveness. It is a measure of change to one thing when something that affects it changes. When thinking about elasticity as it relates to business management, it is helpful to think of a rubber band. If the rubber band is elastic, it will stretch when you pull it. Elasticity in demand means that the price will respond when demand changes. If the rubber band is a heavy-duty rubber band and is difficult to stretch, then even when you pull it, it doesn’t give very much. Elasticity as it relates to business economics has to do with price, ie, the rubber band, and demand, ie, the pull.
Demand Elasticity
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Demand is elastic when it is easily affected by raising or lowering the price of a product or service. Your sales will decrease when you raise the price of your product or service if consumers are price-conscious and they have a lower price alternative from your competitors. Therefore, pricing must be given a great deal of weight in your marketing strategy if these other conditions exist. The degree of elasticity will tell you how much you can raise prices before your sales start to fall.
Demand Inelasticity
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Inelastic demand is when a product or service can increase in price without having a negative effect on demand. For instance, cigarettes can increase in price significantly, but smokers will still buy them. This can also be seen when it comes to the types of goods the government chooses to tax. Cigarettes and gasoline are two products that have price inelasticity. If your business is an ambulance service, you have a high degree of demand inelasticity because when a consumer needs your service, they will not go elsewhere if your price is higher than your competitor.
Customer Loyalty
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Customer loyalty has a stabilizing effect on the market, that is, it makes demand less elastic. When customer loyalty is a factor, you can charge a little bit more than your competitor without adversely affecting sales because demand will not respond as significantly to pricing. This is the value behind branding. Branding your company or your product creates customer loyalty, which makes market demand less elastic.
Product Quality
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The quality of your product or service has an effect on elasticity as well. When your product or service is superior in quality over your competitors, you can charge more for it, therefore quality will make a demand less elastic. However, there is a certain price point where sales will plateau and then drop. Elasticity is a measurement of the degree to which demand will respond to price and how other market factors, such as consumer price consciousness, product quality and customer loyalty will affect that demand.
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Writer Bio
Lisa Dorward was a corporate financial executive and business consultant for more than 15 years before becoming a writer in 2003. She has B.A. degrees in both history and creative writing and earned her M.F.A. in creative writing in 2008, specializing in novel-length historical fiction.