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Economics
Price elastic products are those in which an increase in price will trigger a percentage fall in demand (Investopedia, 2009). The percentage will depend on the degree of elasticity. Products with a high degree of elasticity will see a steep fall in demand in response to a price increase while those with lower elasticity will see a less steep fall in demand in response to the same price increase (Moffatt, 2009). The reverse is also true. A decrease in price will trigger an increase in demand that corresponds to the degree of price elasticity the product has.
As a retailer, the best time to have a price elastic product is when (wholesale) prices are at the equilibrium point. The objective of the retailer is not to maximize unit sales, but to maximize profit, which is defined as profit per unit multiplied by the number of units sold. The profit per unit is determined by the margin, which is typically a percentage of the wholesale price. The profit is the crucial measure because the retailer must cover fixed costs. It is important to note that for any product, there is a demand ceiling, so the equilibrium point will not be the point at which price approaches zero and demand goes to infinity. Likewise at the upper end the potential demand will equal zero at a given price point, thus there is no point at which a sale of one unit at near-infinite product exists.
The equilibrium point will be different for each product, but will always be the point at which total dollar profit is maximized. A steep decline in price may mean a steep increase in sales, but the result may be lower profit than if the margin was higher and sales lower. Thus, the best point at which the retailer would want to own a business that sells price elastic products is when the price is at the point of equilibrium that enables the retailer to maximize profit.
Works Cited:
No author. (2009). Economics Basics: Elasticity. Investopedia. Retrieved September 13, 2009 from http://www.investopedia.com/university/economics/economics4.asp
Moffatt, Mike. (2009). Price Elasticity of Demand. About.com. Retrieved September 13, 2009 from http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
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