As is known, the income of any company, enterprise and a private entrepreneur depends on many factors, but perhaps the most important of these is the sales volume of products sold.From its size it depends largely on what will be the level of revenue and the net profit.This factor, in turn, depends on whether demand is elastic, and the selected pricing strategy.On the one hand, the higher will be the cost of the goods, the less it will fly.On the other hand, at low prices and revenues would be miserable.What kind of pricing strategy for an entrepreneur to be the best?The answer lies in the study of the dynamics of demand.
Flexibility in terms of economy
the first time this issue has attended a world renowned scientist, as A. Marshall.It was he who introduced the elasticity through which you can easily discern when demand is elastic, and when not, and on this basis to select the most profitable trading strategy.What is this concept?Under elasticity in economic theory implies the ability of some variables respond to changes that have occurred with other values on which they directly depend.On the demand side, that it primarily affects the selling price.
Calculation of elasticity and plotting
ΔQ denote the percentage change in the value of sales, and through ΔP - corresponding change in the value of production.Seeking elasticity coefficient is nothing but, as the ratio of these two parameters, taken with the opposite sign: εrD = - ΔQ / ΔP.In cases where this figure is greater than one, say that demand is elastic.When it is smaller, it means the opposite.If the resulting ratio is equal to 1, it is assumed that the demand is unit elastic demand.The dependence of sales on the price for visibility is often displayed on the coordinate axes.Usually the vertical noted an increase in the unit cost of goods, and across - the amount of revenue.Schedule elasticity of demand is a straight line inclined with its right end down.An example is shown on the left.
Factors elastic demand
There are certain causes that somehow influence the behavior of consumers and the volume of purchases made by them.With regard to the elasticity of demand, the following factors:
- size of income.The smaller, the greater the role played by the cost of goods.
- time factor.In the long run usually demand is elastic, and if the offer is valid for a short time, the price goes by the wayside.
- presence "substitute products".The more, the greater the role played by the price.
- The share of this product in the budget of consumers.The higher it is, the demand elasticity.
- quality products.On the luxuries usually εrD & gt; 1, and objects typically need εrD & lt;1.
- stockpiles.The more the products already purchased the buyer, the more important it is for the price, and therefore the elasticity of demand above.
- width of the product category.We specialized products demand is less elastic, and vice versa.
Choice trading strategy
When demand is elastic, the best trading strategy for the company will lower prices.Such a policy will ultimately maximize net profit.If demand is inelastic, then the strategy of "cream-skimming", ieincrease in sales prices.When the calculations give a result very close to or equal to one, it means that entrepreneurs should look for other methods of increasing revenue.Manipulation of prices in this case, absolutely nothing will.
