Elasticity is one of the micro-economic concepts that are significant for investors while analyzing the operating environment. It helps them to determine the response of consumers on a shift in the prices of a commodity. The most significant role elasticity plays in a business is helping the investor to set the prices of commodities. An effective pricing strategy is significant in maintaining competitiveness in the market as well as maintaining a large consumer base. It requires knowledge regarding consumers as well as competitors. Data on the price elasticity of demand can be used to make predictions regarding future sales (Vaishampayan 2007 p 36). Elasticity quantifies the receptiveness of demand for commodities to price changes.
Elasticity can be used to improve sales or the quantity demanded, depending on the anticipated reactions by consumers to price changes. For example, a producer may decide to increase the sales/quantity demanded by reducing the price of commodities. If consumers are sensitive to price, they are likely to purchase more. In that case, demand is elastic. On the other hand, when consumers are not sensitive to prices they are unlikely to purchase more. The demand, therefore, is inelastic (Cachon amp. Terwiesch, 2008 p 91).
There are other forms of elasticity, such as price elasticity of supply, whereby when the supply is high, producers tend to increase the quantity supplied in the market. Income elasticity on demand is also a significant form of elasticity that affects a business. When for example the consumer’s income rises, they tend to demand more and vice-versa (Fairey 2006 p 73). This essay is a critique of elasticity. It mainly focuses on the price elasticity on demand and supply and some aspects of income elasticity on demand. The essay also highlights the significance of elasticity in planning for improved performance in the business.