Price Elasticity

Price Elasticity
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Price Elasticity
Price elasticity is the measure of degree of responsiveness of the quantity of a demanded commodity to the change of its own price. A commodity is elastic if the quantity demanded causes more than proportionate change in the price. A commodity is inelastic if the quantity demanded causes are less than proportionate price change CITATION [Ano14]Ano14.
Businesses and firms seek to increase consumer satisfaction and increase revenue for the business and profits for stakeholders. Therefore, there is a need for clear attention to pricing. Price elasticity is a crucial determinant to identifying a brand’s competitors. Service or product demand constitutes a firm’s price relative to the price of the competitor. When the price elasticity of two goods is positive then the goods are substitutes in consumption, whereas when it is negative, they are compliments. A cross-price elasticity that is zero means that there is no correlation. When the goods are substitutes, the increase in price causes the demand of the good to decrease while the demand of the substitute to increase CITATION [Rob09]Rob09.
In addition, the number of uses of a commodity determines its price elasticity. For a firm that produces aluminum products, price change does not affect its demand contrary to a firm that produces butter, which has limited uses. Therefore, cross elasticity of demand plays an important role in setting of prices in firms. It measures the degree of substitutability and complementarity of different commodities.
The higher the positive value, the higher the degree of substitutability, whereas the higher the negative value, the higher the degree of complementari...