Price elasticity of demand in consumer products

¶ … business that sells price elastic products? Why?

Price-elastic goods are goods and services for which consumer demand is highly responsive to changes in price. Low-end luxuries that people can easily cut back upon or substitute with comparable goods and services constitute price-elastic goods. Coffee bought outside the home, toys, and vacations are all examples of price-elastic goods. When the recent recession began to spiral out of control, the first things financial advisors suggested to families cutting back was to forego their morning Starbucks latte, say 'no' to their begging children, and to do 'staycations' rather than vacations over the holidays. Some airlines were forced to operate at a loss, simply to encourage individuals to keep in the habit of flying and to generate positive publicity. Conversely, during boom times, most of these goods and services will experience a sharp spike in demand -- when the economy improves, people in all income brackets are more willing to spend money on small luxuries.

In general it is assumed that it is highly disadvantageous to sell price-elastic goods. However, in some instances it can work to the producer's advantage. Selling large amounts of a very cheap product can produce profits through economies of scale. For example, selling large amounts of a cheap-to-produce but highly 'in-demand' toy can generate a profit for a toy company such as Mattel. Producing inexpensive restaurant meals for McDonald's has been highly profitable, given its ability to sell many burgers quickly and to create standardized franchises all over the world. Having the ability to produce in large volume also buffers a firm against the danger of a price-elastic good getting into a price war with other firms. In the case of Mattel and McDonald's, both firms are so large and have such brand recognition, they are protected to some extent of being forced to sell at such a low price they cannot cover their overhead.