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What is Price Elasticity of Demand?
The Price Elasticity of Demand refers to the change in the price of the product as a result of the change in the demand for that product.
For instance, there is an increase in demand for COVID-19 vaccines. Thus, the price of that vaccination will also increase. This difference in the price of the vaccination that occurs due to the high demand can be called the Price Elasticity of Demand.
Some items are considered less elastic than others. For instance, water – the price and demand for water is constant because it is a necessity. However, other products are highly elastic. For instance – gold, the prices of gold rise up during festive seasons due to high demand.
What is Price Elasticity of Demand in SaaS?
Saas products may or may not be elastic. This is because an increase in the price of a product will see a drop in demand if there are more cost-friendly substitutes available in the market.
Although, increasing costs is a common practise in business, which is why it is important to place the SaaS product as crucial and unique. Buyers should feel that the product is valuable enough to incur an extra cost. This way, brand loyalty can be established.
Having said that, while considering price changes, companies should keep in mind that this is likely to affect the demand of the product especially if new competing products are entering the market around the same time.
Q: What is the formula to calculate the Price Elasticity of Demand?
A: The formula for Price Elasticity of Demand is the percentage change in quantity of the product divided by the percentage change in the price of the product. For example, if you buy 25% quantity of a product and the price increases by 50%, the price elasticity can be calculated as 25% divided by 50% which equals 0.5. Therefore, the price elasticity of this product is 0.5.
Q: What is an example of price elasticity?
A: Let’s take an example of the COVID-19 vaccines. There is an increase in demand for vaccines. Thus, the price for each dose of vaccination will also increase. This difference in the price of the vaccination that occurs due to the high demand can be called the Price Elasticity of Demand.
Q: Why is the Price Elasticity of Demand important?
A: By knowing the Price Elasticity of Demand, companies can allot suitable prices for their product. The demand for products is highly based on price fluctuations and to have a competitive edge and avoid loss, understanding price elasticity is important.