Elasticity And Dynamic Pricing

Annette Pamela Ruiz Abreu

A01423595

Checkpoint 1

Elasticity And Dynamic Pricing

The videos we watched were created by the Wall Street Journal. The first one was about elasticity. Elasticity is a concept used to describe the effect that a change in price has on demand. When a good is elastic and the price of it increases, the demand for it falls. When a good is inelastic and the price of it increases, the demand for it doesn’t change or doesn’t decrease by a lot. Luxury products are elastic and necessities are inelastic because if the price of your favorite perfume goes up, you probably won’t buy it, but if the price of water goes up by the same percentage, you probably will still buy it because you can’t live without water. Elasticity is affected by many factors such as the closeness of substitutes, proportion of income spent on the good and the time that has elapsed since the price change.

The second video was about dynamic pricing. Dynamic pricing is the practice of changing the price of a good or service regularly depending on the demand. When the demand of a good is very high, the price of the good will increase. When the demand lowers, the price will lower with it. Since demand can change rapidly (within minutes or hours), dynamic pricing allows companies to change the prices easily and effectively. The price can also depend on the price of other retailers or substitutes. Not everyone likes dynamic pricing and it can affect whether a consumer buys your product, but it is a technique that is being used more and more by companies.

How to use price elasticity to find optimal price point

As mentioned, elasticity measures the effect that price changes have on demand. Therefore, when deciding the price of your good or service, it is very important to take the elasticity of your product into account and the marginal cost.

1. Calculate marginal cost: [pic 1]
2. Calculate price elasticity: [pic 2]
3. Calculate optimal price: [pic 3]

Another way of determining the optimal price of a product is answering the four questions of the Van Westendorp analysis.

1. What price would be so low that you would start to question this product’s quality?
2. At what price would you consider this product a bargain?
3. At what price does this product begin to seem expensive?
4. At what price is this product too expensive?

Personal Reflection

1. What is the most interesting information that I have learned so far?

I think elasticity and market equilibrium have been the most interesting topics so far because they’re important and not so easy to understand. Demand and supply are basic concepts that you can understand easily, but elasticity and market equilibrium are important concepts in microeconomics that affect supply and demand, but that are a bit more complex or new to me.

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