{"id":2156,"date":"2018-03-27T23:23:18","date_gmt":"2018-03-27T23:23:18","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/?post_type=chapter&#038;p=2156"},"modified":"2024-04-25T03:01:35","modified_gmt":"2024-04-25T03:01:35","slug":"price-elasticity","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/chapter\/price-elasticity\/","title":{"raw":"Price Elasticity","rendered":"Price Elasticity"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\n<ul>\r\n \t<li>Define price elasticity<\/li>\r\n<\/ul>\r\n<\/div>\r\nElasticity is a classic economic principle that helps us\u00a0understand how much a change in price will affect\u00a0market behaviors. If we make a change in price, how will that impact\u00a0the demand for the product? Price elasticity is the measure of the market\u2019s response to price changes.\r\n\r\nElasticity is important to pricing decisions because it helps us understand whether raising prices or lowering prices will enable\u00a0us to achieve our business objectives. How much will a lower price increase sales? Will a price increase cause us to lose many customers or just a few? Price elasticity is another factor to consider in order to select the most effective\u00a0pricing strategy.\r\n\r\nElasticity in price denotes a large impact on demand due to changes in price. Raising the price causes decreased demand, while lowering the price stimulates increased demand. Inelasticity refers to the situation where there is insensitivity to price\u2013demand will not increase or decrease despite changes in price.\r\n<h3>Case study from a mass-merchant retailer illustrating price elasticity<\/h3>\r\nIn the 1980\u2019s there was a certain men\u2019s denim jean manufacturer who had the dominant brand in the market. Their brand was so popular that they could not physically produce enough product to satisfy all of their retail customers. In order to be fair to all of their customers, the company devised an \u201callocation\u201d system that gave all retailers the same percentage of their desired orders. For example, if a retailer wanted to buy 100,000 pairs of denim jeans for the season, and the allocation was 80%, the retail customer could expect to receive 80,000 pairs.\r\n\r\nOn the retail side, an annual event called \u201cBack to School\u201d was the most popular time to sell denim jeans. All of the major retailers targeted the middle of August to advertise their big sale of the popular jean brand. These were days well before \u201cbig data\u201d analytics, but the mass merchant in question had been running this promotion at the same time for many years and so knew exactly how many pairs of the denim jean product it would sell by month, week and day given the price.\r\n\r\nThe retailer in this case study knew that it would sell 50,000 pairs a week at a sale price of $24.99, 75,000 pairs at $22.99, and 120,000 pairs at $19.99 sale prices. So it become a matter of the supply (how much did the retailer have in stock) versus the projected sales at the various sale price options. If the mass-merchant could procure 85,000 units of the denim jean product, then they had to set their big sale price no lower than $22.99 or risk selling out.\r\n\r\nThis is a classic example of price elasticity. You have the situation of limited supply and highly sensitive market reaction to the price of the goods in question.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/33ac91e6-2d46-4138-93a0-12a56ccd2862\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<ul>\n<li>Define price elasticity<\/li>\n<\/ul>\n<\/div>\n<p>Elasticity is a classic economic principle that helps us\u00a0understand how much a change in price will affect\u00a0market behaviors. If we make a change in price, how will that impact\u00a0the demand for the product? Price elasticity is the measure of the market\u2019s response to price changes.<\/p>\n<p>Elasticity is important to pricing decisions because it helps us understand whether raising prices or lowering prices will enable\u00a0us to achieve our business objectives. How much will a lower price increase sales? Will a price increase cause us to lose many customers or just a few? Price elasticity is another factor to consider in order to select the most effective\u00a0pricing strategy.<\/p>\n<p>Elasticity in price denotes a large impact on demand due to changes in price. Raising the price causes decreased demand, while lowering the price stimulates increased demand. Inelasticity refers to the situation where there is insensitivity to price\u2013demand will not increase or decrease despite changes in price.<\/p>\n<h3>Case study from a mass-merchant retailer illustrating price elasticity<\/h3>\n<p>In the 1980\u2019s there was a certain men\u2019s denim jean manufacturer who had the dominant brand in the market. Their brand was so popular that they could not physically produce enough product to satisfy all of their retail customers. In order to be fair to all of their customers, the company devised an \u201callocation\u201d system that gave all retailers the same percentage of their desired orders. For example, if a retailer wanted to buy 100,000 pairs of denim jeans for the season, and the allocation was 80%, the retail customer could expect to receive 80,000 pairs.<\/p>\n<p>On the retail side, an annual event called \u201cBack to School\u201d was the most popular time to sell denim jeans. All of the major retailers targeted the middle of August to advertise their big sale of the popular jean brand. These were days well before \u201cbig data\u201d analytics, but the mass merchant in question had been running this promotion at the same time for many years and so knew exactly how many pairs of the denim jean product it would sell by month, week and day given the price.<\/p>\n<p>The retailer in this case study knew that it would sell 50,000 pairs a week at a sale price of $24.99, 75,000 pairs at $22.99, and 120,000 pairs at $19.99 sale prices. So it become a matter of the supply (how much did the retailer have in stock) versus the projected sales at the various sale price options. If the mass-merchant could procure 85,000 units of the denim jean product, then they had to set their big sale price no lower than $22.99 or risk selling out.<\/p>\n<p>This is a classic example of price elasticity. You have the situation of limited supply and highly sensitive market reaction to the price of the goods in question.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_33ac91e6-2d46-4138-93a0-12a56ccd2862\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/33ac91e6-2d46-4138-93a0-12a56ccd2862?iframe_resize_id=assessment_practice_id_33ac91e6-2d46-4138-93a0-12a56ccd2862\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-2156\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Price Elasticity. <strong>Authored by<\/strong>: Bob Danielson. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":9,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Price Elasticity\",\"author\":\"Bob Danielson\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"3d32deab-5766-4877-9684-c8ba6a3dc958, 5a5c0a5b-7629-4862-91da-b8e12b36cbb4","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-2156","chapter","type-chapter","status-publish","hentry"],"part":2139,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2156","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":14,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2156\/revisions"}],"predecessor-version":[{"id":6504,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2156\/revisions\/6504"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/parts\/2139"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2156\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/media?parent=2156"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapter-type?post=2156"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/contributor?post=2156"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/license?post=2156"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}