Demand and Supply Elasticity, Essay Example

Price elasticity of demand: This concept is important because it helps me understand why the prices of some items such as luxury changes often and often by a significant margin while the prices of normal goods change slowly and usually by a smaller proportion. If I become an entrepreneur, this concept will also help me with pricing strategy. I will be more likely to raise prices if the price elasticity of demand for my product/service is inelastic since it will result in greater profitability.

Determinants of price elasticity of demand: This concept explains why new products technologies are often expensive but become more affordable over time as substitutes emerge. Since I hope to become entrepreneur, this concept will help me focus on differentiation from the competition in order to achieve lower price elasticity of demand and, thus, greater pricing power. This concept also helps me learn why U.S. Government is encouraging development of alternative energy sources. At the moment oil has low price elasticity of demand due to absence of reliable alternatives.

Cross price elasticity of demand: I often wondered why cell phone service providers give away device for free or cheap and this concept provides me with the answer. This concept may help me with investments in stock. Instead of directly competing in popular companies, I may invest in their suppliers since suppliers will direct benefit from a rise in demand of the product/service offered by the company.

Income elasticity of demand: This concept explains why luxury companies are going to China. This concept will be helpful if as an entrepreneur I decide to sell my products overseas. I will carefully choose a country why incomes may be rising but the demand for products similar to mine may be offering at even higher rate.

Price elasticity of supply: This concept helps me understand why high profit margins often attract new competitors in the industry which increase total supply by such a great margin that prices eventually fall. In other words, such industries exhibit elastic price elasticity of demand. This may mean that equity investments in energy companies may be a good investment for me because natural resources such as oil and gas are fixed and, thus, more likely to continue to enjoy high prices.