Readers Question: When would you want to own a business that sells price-elastic products? Why?
Price elastic products mean that if there is an increase in price, there will be a bigger % fall in demand. Therefore, with elastic goods, there is little incentive to increase price because there will be a bigger % fall in demand. Elastic products suggest the good is in a competitive market and therefore it is more difficult to make profits. If demand was price inelastic a firm could put up prices and make profits, for example, a firm with monopoly power is likely to have inelastic demand.
When Price Elastic products are Beneficial
1. For a Sales Maximising Firm.
If a firm wishes to increase market share and increase its sales then price elastic means that cuts in price will beneficial in increasing sales.
- However, it depends on how other firms react. If one firm cuts its price, demand may be elastic, but if all the other firms follow suit demand is likely to be inelastic and the price war only causes a small increase in sales (see Oligopoly Kinked demand curve)
2. Economies of Scale
If a firm is producing a good with economies of scale. Cutting prices will enable lower average costs because output can increase, this could even increase profitability.
3. Elasticity is not the Most Important Factor in Determining Profitability.
Having inelastic demand goods (e.g. trains) doesn’t make a firm profitable. Similarly having price elastic good doesn’t mean you are unprofitable. The key is whether Revenue is Greater than Costs. For example, confectionery is quite elastic, there are many different types to choose from; but the market is still quite profitable.
Note demand for chocolate is inelastic. but demand for individual bars is price elastic.
Cigarettes have very inelastic demand, but, individual brands are still elastic because there is choice for consumers.
Most goods have an elastic demand, unless there is a pure monopoly.