How can understanding elasticity of demand help you make better business decisions?

The increased demand for NVIDIA's products, particularly in the AI server segment, combined with an improvement in GPU supply, is providing the company with a unique opportunity to leverage demand inelasticity to its advantage. Given this scenario, NVIDIA has the opportunity to adjust its pricing strategy accordingly. The company can charge higher prices for its products, capitalizing on the fact that customers are less sensitive to price changes due to the critical role of NVIDIA GPUs in powering AI infrastructure. Goldman Sachs' bullish stance on NVIDIA, reflected in its Buy rating and updated price target of $800, underlines the potential for the company to capitalize on this demand inelasticity.

As elasticidades são as variações percentuais de varáveis que provacam mudanças em outras. Se aplicam a oferta, demanda e preços. São classificadas em elasticidade-renda demanda; preço cruzado da demanda e a elasticidade nos mercados financeiros e de trabalho. E são aplicadas a muitas conexões éconômicas.

- For goods and services such as utilities or life-saving drugs, you still need to "consume" the goods even at higher prices. Yes the demand may be lower, but it will not decrease significantly. In this case, your demand is not sensitive to prices; it is inelastic. - For goods such as discretionary products and services (entertainment, gaming, movies, music), you will consume the product much less at a higher price. In this case, you're sensitive to a change in price; your demand is elastic. - Unitary elastic is a special case in theory and quite hard to find a precise example in real life.

Let's imagine you and your friends love buying candy. If the price of your favorite candy suddenly goes up, but you still buy the same amount because you can't find a similar candy elsewhere, that's called "inelastic demand." It means you're not too bothered by the price change. But if another candy tastes almost the same, and it's cheaper, you might switch to buying that one instead. That's "elastic demand." You're really sensitive to the price change because you have other options. Now, imagine there's a special candy you all love. If the price of that candy goes up a bit, but you still buy it because you can't find anything quite like it, that's called "unitary elastic demand" It means you're sensitive to price changes, but not as much

Elasticity of demand, measured as the percentage change in quantity demanded for a percentage change in price, allows companies to assess the sensitivity of demand to changes in key variables. This knowledge is crucial for setting optimal prices that maximize revenue, planning production and inventory efficiently, segmenting the market based on price sensitivity, and evaluating the impact of marketing strategies on demand. Ultimately, understanding demand elasticity makes it easier to optimize business strategy to achieve specific profitability and growth objectives.

A elasticidade deve ser calculada de acordo com as especificidades do negócio. Nos bens considerados normais. A renda é determinante, um aumento produz um deslocamento positivo da demanda de um produto superior e um deslocamento negativo de um produto inferior . Que pode ser equilibrado através do preço desde que os custos de produção permitam. Nos bens considerados complementares a elasticidade preço- demanda é negativa Um preço mais elevado para X diminuira o consumo de Y. Nos bens considerados substitutos um aumento do preço de X aumenta o consumo de Y.

Imagine you sell a toy for $10 and usually sell 100. You raised the price to $12 and now sell 80. The elasticity of demand measures how much people react to price changes. Here's the math: If quantity demanded goes from 100 to 80 (a -20% change) and the price goes from $10 to $12 (a +20% change), the elasticity is calculated as (-20%) / (+20%) = -1. This "-1" means demand is "unitary elastic": For every 1% price increase, there's a 1% decrease in quantity demanded.

Understanding elasticity of demand as a business is really about knowing and understanding your market and customers. If you increase or decrease your price (or if your competitor firms or industries change their prices), who will your customers react? If you have a good sense of this elasticity, then you can optimize what price gives you the most profits and you can understand how what your competitors and competing industries do will affect your sales.

In theory, elasticity is how much the demand decreases with an increase of 1% in price. So, you can find the elasticity of demand (or supply) by simply dividing the change in demand (or supply) by the change in price. Yet, in reality, a well-known problem in estimating elasticity of demand (or estimating the demand function in general) is that the intersection of supply and demand curves jointly determines that price and quantity. This endogeneity of prices and quantities will lead to a biased parameter estimate. Hence, we should use appropriate econometrics approaches (such as instrument variables) to tackle this endogeneity problem.

Get this if elasticity is greater than 1, demand is elastic, less than 1, demand is inelastic, equal to 1, demand is unitary elastic. 1. If people really change how much they buy when prices change a little, it’s elastic. If they don’t change much, it’s inelastic. 2. If you buy more of something when you make more money, it’s elastic. If you buy less, it’s inelastic. In elastic demand, goods purchased more are considered normal goods. In inelastic demand, goods purchased less are considered inferior goods. 3. If two things go together, like burgers & fries, & you buy more fries when burger prices go up, they’re substitutes. But if you buy less fries, they’re complements.

Fundamentally, the microeconomic theory gives us a clear logic in using elasticity of demand to decide on price: If the demand is ineslatic, i.e., the buyers are not very sensitive to price and still keep buying the product if the price increases, the firm then can exploit this inelasticity of demand by increase the price (and is not afraid of losing customers). In contrast, if the demand is very elastic, i.e., customers are very sensitive to price and drop out massively if the price is higher, the firm then cannot increase price under the risk of losing customers.

Permite conocer el tipo de consumidor para un determinado producto y generar estrategias de precios. En épocas de inflación (caso Argentina), con aumentos permanentes y riesgo de quedar "fuera de mercado", permite también entender sobre que productos concentrar la atención (entre los que más aportan los más elásticos).

Elasticity guides marketing strategies by tailoring approaches based on demand responsiveness. For elastic demand, emphasize product differentiation and value, offering discounts and incentives. Inelastic demand warrants investment in branding and customer service to foster loyalty. Unitary elasticity demands ongoing market monitoring for price and promotion adjustments.

In production, elasticity insights inform resource allocation and production planning, enabling firms to adjust output levels in response to fluctuating demand conditions, thereby minimizing wastage and optimizing efficiency. Thus, elasticity of demand emerges as a cornerstone in strategic business decisions, facilitating agile adaptation to market dynamics with discernment and efficacy.

The price elasticity of demand for a product should be used to guide strategic decisions and maximize profits. For example, the degree of price setting power is inversely related to the price elasticity of demand (if not perfectly elastic, there is a degree of price setting power). Understanding the price elasticity of demand is not just an abstract concept. Companies looking to maximize profits can use the estimated price elasticity of demand to price their product optimally. Understanding the economic and business environment that is the context for these estimates and how this environment may be changing (e.g., the introduction of substitutes into a market) is equally important for strategic decisions.

In my experience, The elasticity of demand serves as a pivotal factor in enterprise decision-making across pricing, positioning, and production domains. For pricing strategies, understanding demand elasticity allows firms to discern optimal price points to maximize revenue. For instance, luxury brands capitalize on inelastic demand to set premium prices without significant loss in demand. Regarding positioning, knowledge of demand elasticity aids in crafting effective marketing campaigns tailored to specific consumer segments, thereby bolstering brand perception and market penetration.

Conocer la elasticidad de tu demanda te permite tomar decisiones como empresario para optimizar tu producción para maximizar los ingresos. En este sentido, es importante conocer la sensibilidad de la demanda de tus productos ante un cambio en el precio, porque te conducirá a producir la cantidad que determina el precio cuando la elasticidad es 1. Se trata de ajustar los precios hasta que la razón entre el incremento de la demanda y el de los precios sea la unidad.