From the course: Managerial Economics
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Real world elasticities
From the course: Managerial Economics
Real world elasticities
- In the real world, price elasticities depend on many factors, like the switching costs of the customer. Low switching costs indicate that a customer can easily switch from one supplier to another and vice versa. If it is difficult for me to change where I'm buying, we consider the switching costs to be high. Grocery shopping is a good example of low switching costs. A 5% price increase that results in a 15% demand reduction has an elasticity of minus three. The mathematical equation is change in demand divided by change in price equals elasticity. On the other hand, if you spend hundreds of dollars on iTunes for music and videos, your costs to switch to an Android phones are significant. An increase in price of 10% that results in only a 2% demand reduction has an elasticity of minus 0.2. So if it's very easy for the customer to switch suppliers, demand is considered to be elastic, which can be any number between minus one and…
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