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Marketing Basics - Kotler Philip

Price elasticity of demand

Marketers need to know how sensitive demand is to price changes. Let's consider two demand curves presented on fig. 62. From fig. 62a it is clear that an increase in price from C1 to C2 leads to a relatively small drop in demand from K1 to K2. And from fig. 626 shows that the same price increase leads to a significant drop in demand from K1 to K2. If demand is almost unchanged under the influence of a small change in price, we say that it is inelastic. If demand undergoes significant changes, we say that it is elastic.

Inelastic and elastic demand

Fig. 62. Inelastic and elastic demand

What determines the elasticity of demand for prices ? Demand is most likely to be less elastic under the following circumstances: 1) there is little or no replacement or no competitors, 2) buyers do not immediately notice a price increase, 3) buyers slowly change their purchasing habits and are in no hurry to look for cheaper goods, 4 ) buyers believe that the increased price is justified by an increase in the quality of the goods, a natural increase in inflation, etc.

If demand can be called elastic, sellers should consider lowering prices. Reduced price will bring more total revenue. And this approach makes sense as long as there is no disproportionate increase in the cost of production and marketing of goods.