What Determines Price? Part Two

Consumer Demand of Product Prices is influenced by: The Nature of the Market Consumer Demand of Product Production and Marketing Costs Consideration of Channel Members

Price Elasticity of Demand The number of consumers in a target market and the demand they have for a product have a drastic bearing on price Essentially, there are two common principles at work: Consumers purchase higher quantities of products at lower prices The effects of a price change on volume must be factored into pricing strategy In other words: If a price change drastically lowers the quantity of product sold, higher sales revenue or profit will not be met This is known as the price elasticity of demand

Two Types of Demand: Elastic Demand There are two types of demand in marketing: Elastic Demand and Inelastic Demand Elastic Demand Describes a situation in which a small change in price results in a large change in volume Example: Price increases by 5%, volume drops by 20% If demand is elastic, total revenues go up as prices go down and revenues go down when prices go up

Two Types of Demand: Inelastic Demand There are two types of demand in marketing: Elastic Demand and Inelastic Demand Inelastic Demand Describes a situation in which a rise in prices does not change the quantity purchased In this scenario, total revenues go up when prices go up Example: Traditionally Toronto Maple Leaf tickets have increased in price every single year yet they always sell every ticket. Since the demand is strong and the product is always sold there is no fear of losing revenue

Factors that Contribute to Elasticity Proportion of income spent on the good The lower the proportion of income spent, the more inelastic the good will tend to be The number of substitutes The more substitutes a good has the easier it is for consumers to switch to another product if the price goes up The length of time since the price change The longer the time period that has elapsed since the price change, the more elastic demand will be The level of necessity or addiction The more necessary or addictive something is, the more inelastic it will be