What would happen if you raised your prices by 5%? Would it affect your ability to sell more product or services? If after you raised your price by 5% you discovered that it had a very limited effect on sales, it would be said that your price is inelastic or not very elastic. However, if raising prices caused a large corresponding decline in sales, it would be said that your price is elastic.
In economic theory, you want to continue to raise prices until a rise in price produces a corresponding decline in demand. If a 5% rise in price only incurred a 3% drop in demand, you are leaving money on the table and should raise your price further. By contrast, a 7% decline in demand would indicate you have gone too far and you need to reduce your price.
In actual practice, the computation for your business would need to factor in fixed to variable costs. In essence, price elasticity is a measure of your customer’s willingness, after a change in price, to either delay his or her purchase or search for a substitute product or service.
Have you used the theory of price elasticity of demand to maximize the price you charge your customers for your products or services?
