The Impact of Price Elasticity of Demand on Business Strategies

This report provides a comprehensive overview of price elasticity of demand within the field of microeconomics. It begins with an introduction to microeconomics, defining its scope and relevance in understanding consumer behavior and market dynamics. The main body of the report focuses on Task B, which explores the importance of price elasticity of demand for businesses, explaining how changes in price affect product demand. The report then selects the iPhone as a case study to determine its price elasticity of demand, discussing factors such as availability of substitutes, customer loyalty, and purchasing power. Diagrams are used to illustrate these factors and their effects on demand and supply curves. The conclusion summarizes the key findings, emphasizing the significance of price elasticity in business strategy. The report references several academic journals and online resources to support its analysis.

ECONOMICS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK B...........................................................................................................................................3
Importance of price elasticity of demand for business................................................................3
Selection of product or service....................................................................................................4
Determining the price elasticity of demand for iPhone products................................................5
Factors determining the Price elasticity of demand.....................................................................6
Using diagrams to demonstrate factors affecting price elasticity of demand..............................7
CONCLUSION................................................................................................................................9
REFRENCES.................................................................................................................................10

INTRODUCTION
Microeconomics refers to study of individuals, business and firm's behaviour on the basis
of apportionment of resources which are limited in nature. It also deals on choices made by the
persons, what component have influenced their choices and how their choice have affected the
price of the product, its supply and demand. The Marginal utility theory states the satisfaction
gained by the customer by consuming an surplus quantity of a good.
MAIN BODY
TASK B
Importance of price elasticity of demand for business
Price elasticity of demand refers to change of customers demand due to change of price
of product. When the product demand is elastic then the change in the price of good will effect
the products demand but whereas the demand of product is inelastic then the change of the price
will not have any effect on product's demand so price elasticity is an important component for
determining the demand of business product.
As when the price of product increases, the demand of product decreases alternatively
when the price of the product decreases, the demand of the product increases. So the changes of

price and demand of product moves in different directions (Tellis, 1988). So by estimating price
elasticity of demand we can easily know how business will react on change in price of product
will effect change in demand.
 If price elasticity of demand is equal to zero (0) then it determines demand is perfectly
inelastic and the change in price of product will not have any effect on demand of
product.
 If price elasticity of demand is between zero and one (0 and 1) then it states that demand
for product is inelastic and change in price of product will have significantly lower effect
on demand of product.
 In case price elasticity of demand is equal to one (1) then the demand of product is unit
elastic which determines that the change in price of product will have same effect on the
demand of product
 If price elasticity of demand is less than one (>1) then product demand is elastic which
states that any change in price of product will have higher effect on the demand of
product as compared to price.
As referred above that the price elasticity of demand affects the ability of business whether
he should increase the price of the product or not. As there are number of factors which effects
elasticity of product for business. So business should refer to substitutes goods price and
demand, extra cost for changing the product, whether your product is a luxurious item or a
necessity.
Selection of product or service
Selecting iPhone as a product for price elasticity of demand. As iPhone product demand
is inelastic which refers that the customers are ready to pay any amount for the product
irrespective of change in price of the product. So the manufacturer of iPhone can raise the price
of the demand of the product without thinking much about the demand of the product. As
consumers thinks that the producers of Apple provides value of money for their products as well
as after sales service adds benefit to the customers demand.

The apple iPhone is a powerful brand many costumers are ready to buy its product at an
extra cost. In any case the price of the product increases still people will be ready to buy the
product and will continue their purchases (Fibich, Gavious and Lowengart, 2005).
Determining the price elasticity of demand for iPhone products
Demand for iPhone is tremendously increasing as consumers are ready to buy them at a
premium price too and there is no looking back for them to buy any other product. So the
producers or manufacturers of Apple products can increase the price of the good without hurting
the sentiments of its consumers. So it can be truly stated that the apple reached high level of
achievement of fabulous results and high profits because of its increasing sales.
It is possible if iPhone price is slightly decreased it will have tremendous rise in quantity
of demand and it will attract infinite customers. So we can state that the demand of iPhone is
highly elastic as income spend by the consumers on iPhone is proportionately higher then other
mobiles.
Secondly the income elasticity of demand as we all are well aware that mobile has
become a necessity product rather than a luxurious product. So when it comes to iPhone product
it has more features in comparison to its competitors which adds satisfaction and value to its
product. So when purchasing power of consumer increases they want to buy an iPhone. So the
iPhone product is income elastic as product elasticity of demand is greater than one (1) which
determines that the quantity of product demand is higher than the increase in income of its
consumers (What are the elasticity’s of demand for iPhone 2017).
Finally the cross elasticity of demand as we all know there are many substitutes as well as
brands available in the market. So when the prices of iPhone increases many customers who are
willing to buy iPhone has to change their preferences as they cannot afford its increasing prices
and they have to move on affordable mobile who have similar features such as Samsung.
Samsung is a close substitute who is managing to compete with Apple iPhone as his prices are
lower in comparison as well as provides free applications to its users.
However still the iPhone has brought a impact on mobile users definitely a positive
impact on its users as it keeps on providing unique features such as designs, the touch screens,
camera and the user interface (Elasticity of Demand and Supply. 2017).

Factors determining the Price elasticity of demand
1.Availability of close substitutes for product
When close substitutes are available people switch from one product to another in change
of price. If there are more choices are available for substitutes then the elasticity of product
increases and there are more chances people move to substitutes but in case demand of product is
inelastic then people will stick to product only(Andreyeva, Long and Brownell , 2010). Same as
in case with iPhone and Samsung both are leading mobile providers but still people who has less
affordability will move to Samsung and other mobile company and iPhone users will not change
their preferences.
2.Loyalty shown by the customers
Due to loyalty of customers towards brands also results in inelastic demand for the
product. Mainly iPhone users are loyal towards Apple brand will not move to any other brand if
there is increase in the price of the goods.
3.Purchasing power
The purchasing power of consumer also one of the factor which changes customers
outlook. As iPhone is a luxurious product which many people cannot afford and requires them to
shift to another product who is affordable to them.
4.What to choose between luxury product or necessity product
Whatever the case is people will prefer necessity over luxury and will require them to
have lower elasticity towards it.
5.Changes in preferences, taste of consumers and natural disasters.
When customers preferences changes is also one of the important determinant of price
elasticity of demand.

Using diagrams to demonstrate factors affecting price elasticity of demand.
The movement along the demand curve states that he movement is due to change in both
price and quantity demanded. So when the purchasing power of consumers decreases and the
price of product increases, the quantity of product decreases. So when this movement occurs
when there is a change in demand.
.

Like a movement in demand curve we have same in supply curve too. As presented above
such movements occurs when there is a change in quality of goods supplied and change in price
in comparison to original supply of goods and price.
When there is a shift in demand and supply even though the price of product remains
constant then it may be due to change in their preferences, changes in habits etc.

The same way when supply of product changes irrespective of price of product is not
changed. So when the quantity supplied decreases due to natural disaster but price remains
constant.
Explain when there is an increase in supply in the industry
Demand and supply are related to each other and their relationship often affects the price
of products and services. So in supply there is a direct relationship between quantity supplied and
price whereas in demand there is an inverse relationship between quantity demanded and price.
But in case the supply of product increases and demand remains unchanged , then it leads to
lower equilibrium price and increase in quantity of goods (Ghose and Han, 2014). The supply
and demand of goods keeps on increasing and decreasing till the time equilibrium is not reached.
The equilibrium stage is when both demand and supply of products is equal.
CONCLUSION
Price elasticity of demand is important for firm and by determining the factors we can
state that elasticity and inelastic of product depends upon many factors. Demand and supply
relationship affects the price of goods and service as they have inverse or direct relationship with
them.

REFRENCES
Books and Journals
Andreyeva, Long and Brownell , 2010. The impact of food prices on consumption: a systematic
review of research on the price elasticity of demand for food. American journal of public health,
100(2), pp.216-222.
Tellis, 1988. The price elasticity of selective demand: A meta-analysis of econometric models of
sales. Journal of marketing research, pp.331-341.
Fibich, Gavious and Lowengart, 2005. The dynamics of price elasticity of demand in the
presence of reference price effects. Journal of the Academy of Marketing Science, 33(1), pp.66-
78.
Ghose and Han, 2014. Estimating demand for mobile applications in the new economy.
Management Science, 60(6), pp.1470-1488.

Elasticity of Demand and Supply. 2017.
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What are the elasticites of demand for iPhone 2017. Available through:
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