350 word replies 1 reference needed
Ben
There are 3 key factors that are talked about in the book that have an effect on the elasticity of demand for a product.
Available Substitutes: If there are many other options for a product the demand ends up becoming elastic because of the access to alternatives for the consumer. "A key implication of the effect of the number of close substitutes on the elasticity of demand is that the demand for broadly defined commodities tends to be more inelastic than the demand for specific commodities" (Baye & Prince, 2022).
Time: Demand for the good becomes more elastic when consumers have time to react to the price change this gives them the chance to look into other options. "If the price of tea increases, over a longer period of time, consumers may be more willing and able to shift their purchases to substitutes such as coffee, perhaps by investing in a coffee maker" (Baye & Prince, 2022).
Expenditure Share: Goods that have a small contribution to a consumer's spending (Low cost items) have an inelastic demand since the price will cause there to be a very limited effect on the quantity being purchased. Higher priced goods that take up more of a consumer budget will become elastic if price would rise. "Even though, from a nutritional standpoint, meat is more important than pepper for many households, the demand for meat tends to be more elastic because a much larger proportion of people’s budgets is spent on meat" (Baye & Prince, 2022).
Price elasticity has a variety of effects on an industry, understanding whether the current demand in there market is elastic or inelastic will help them make decisions about their pricing and strategies to succeed in the industry. This will end up helping them maximize their revenue as well as manage the competition in the industry.
To make the demand for a luxury product inelastic I would make sure the brand holds a top tier brand identity. Having a limited product creates scarcity this causes the feeling to the consumer that the product is the only of its kinds and creating an experience for the consumer as the purchase will allow the product to be inelastic.
Baye, M. R., & Prince, J. (2022). Managerial Economics and Business Strategy (10th ed.). McGraw-Hill Education.
Andrew
The elasticity of demand measures how much the quantity demanded of a product changes when its price changes. Several factors influence the elasticity of demand. One factor is the availability of substitutes. If a product has many substitutes consumers can easily switch to alternatives if the price increases. This makes demand more elastic. For example, if the price of Gatorade rises, people might choose to buy Powerade instead. Another important factor is whether a product is a necessity or a luxury. Necessities like food or medicine usually have inelastic demand because people need them no matter of price changes. Luxury products like designer clothes are more elastic since consumers can decide not to buy them. Also, the amount of income spent on a product affects its elasticity. Expensive items that take up a large part of a person’s income usually have elastic demand because price changes are noticeable. Finally, the time frame is important. Over time people adjust their habits which makes demand more elastic in the long run. For example, if gas prices rise, consumers may eventually switch to more fuel efficient vehicles like electric vehicles.
Understanding price elasticity is crucial for businesses and industries. Products with elastic demand require careful pricing strategies since raising prices can reduce sales and revenue. For inelastic products, businesses can increase prices without losing many customers which increases revenue. "When demand is inelastic, an increase in price raises total revenue because the price effect outweighs the quantity effect" (Mankiw, 2020). This allows company's to make informed decisions about pricing and profitability.
If I were a luxury product manufacturer I would focus on making demand inelastic. I would try to differentiate the product by focusing on unique features and brand quality to reduce substitutes. Additionally, building brand loyalty can make consumers less sensitive to price changes. "Brand loyalty creates a perception of exclusivity, making customers less responsive to price increases" (Frank and Bernanke, 2021).
References
Frank, R. H., & Bernanke, B. (2021). Principles of Microeconomics (6th ed.). McGraw Hill. Mankiw, N. G. (2020). Principles of Economics(9th ed.). Cengage Learning.