The price elasticity of demand describes how the quantity of the demanded goods will react to changes in the price. Let's look at the diagram. the x axis that runs horizontally represents the quantity of sold goods in pieces. the y axis around the vertically describes the price in doors. In this example, last month, when we were selling a price before the orange color, we sold quantity before also in Orange County. This month, we are investigating the price elasticity of our product or service.
We have increased the price by 1% to the price in green on the y axis gold price now this resulted in 2% drop down in the salt quantity, green quantity now. When the absolute value of the percentage change of the demanded quantity is bigger than the percentage of the price change, then we have elastic demand. The bigger the differences, the higher the electricity. elastic demand means that small reduction in the price will cause greater increase of the sold goods. It also means that small increase in the price will lead to greater drop down in the demanded quantities. The other conclusion is that when we have low elasticity, also called inelastic demand, we should increase our prices.
Provided our price strategy goal is to maximize the profit. It's easy to say increase the prices, but how much for marketing specialists that are doing this for the first time. I recommend a step of 10% increase I say step because after it is done once there should be new elasticity test and if the result is still low elasticity situation, then new step is to be taken. The iterations continue, either until the elasticity changes from inelastic to elastic or until we see normal financial benefits to continue further. To recap, price elasticity is the percentage Change of quantity demanded in response to 1% change in price. The formula is very simple.
Look in the middle of it, the absolute value of the percentage change in quantity is divided by the absolute value of the percentage change in price. If the formula result is greater than one, there is a case of elastic demand. If the result is less than one, then the demand is inelastic. This is true for most goods. Exceptions are Veblen goods, and given goods, reference goods or some luxury products that meet increased demand. When priced higher.
Givens goods are closely related to people with really very low incomes that are buying the inferior product. like bread, even when its price is going much higher in comparison to bread substitutes Veblen and given goods require special pricing approach that is outside the scope of this course, as they're very rare. I believe that your key products on target groups are not among them. I mentioned them because I want you to be aware of their existence. And if your business is dominated by Veblen or giffen goods, you may want to browse the internet to learn more, or to mail me. The essence of the price elasticity of demand lies in the following graph.
I will remain silent as everything was said in the previous two slides.