Elasticity: The Economic Concept Behind How Companies Price Products | WSJ Price Index

Summary

The video script discusses the concept of price elasticity during high inflation periods, noting consumer spending has remained resilient despite rising prices. It explains elasticity's impact on demand and how companies aim for inelastic products. The script also explores factors affecting elasticity, such as necessity, competition, and consumer perception, and how companies like P&G and Kraft Heinz are adapting strategies, such as promoting cost-saving benefits and offering smaller-sized products, to maintain market share amid changing consumer behavior and economic pressures.

Takeaways

• 📈 Consumer elasticities have held up better than expected year-to-date, despite high inflation.
• 🔍 Companies anticipate increased price elasticity, meaning demand may fall as prices rise.
• 💡 Price elasticity is a measure of how sensitive the quantity demanded of a good is to a change in its price.
• 🛍️ Elastic products, like perfumes and staples, see demand decrease with price increases, while inelastic products, like groceries and toilet paper, do not.
• 🏠 Branded household goods have shown inelasticity, with consumers continuing to spend on these items even during economic downturns.
• 💼 Companies prefer inelastic products as price increases do not significantly impact demand.
• 💰 Gym memberships are currently inelastic, with price increases not leading to a decrease in membership rates.
• 🛒 There has been a shift in consumer spending from goods to services as the economy recovers from the pandemic.
• 🔑 Factors affecting elasticity include the necessity of the product, competition, availability of alternatives, and consumer emotions towards the brand.
• 📉 Companies like Unilever, Proctor and Gamble, and Kraft Heinz have reported lower volumes, indicating that some products are becoming more elastic as demand decreases with price increases.
• 🛒 Strategies to maintain market share when products become more elastic include promoting cost-saving benefits and offering smaller-sized products at lower prices.

Q & A

What is price elasticity and why is it important during periods of high inflation?

Price elasticity measures the responsiveness of the quantity demanded of a good to a change in its price. It is important during high inflation because it helps companies understand how sensitive consumer demand is to price changes, which can affect their pricing strategies and revenue.

Why have consumer elasticities held up better than expected year-to-date despite high inflation?

Consumer elasticities have held up due to various factors, including consumers' continued willingness to spend on certain goods and services, as well as the resilience of certain sectors like travel and experiences post-pandemic.

What is the difference between elastic and inelastic products in terms of demand response to price changes?

Elastic products are those where demand is significantly affected by price changes; if the price goes up, demand falls. Inelastic products, on the other hand, have demand that is less sensitive to price changes, meaning a price increase does not significantly impact demand.

Why do companies prefer their products to be inelastic?

Companies prefer inelastic products because it means they can raise prices without significantly affecting demand, allowing them to maintain or increase revenue without losing customers.

What factors make a product's demand more elastic or inelastic?

Factors affecting elasticity include the necessity of the product, availability of alternatives, consumer perception of the brand, and the price range of the product. Emotional attachment to a brand can also play a role.

How has the pandemic affected the elasticity of certain household goods?

During the pandemic, branded household goods have proven to be inelastic, as people continued to spend on these items even during economic uncertainty, contrary to past trends where consumers might switch to cheaper alternatives.

What is an example of a company that has successfully raised prices without seeing a dip in demand?

Planet Fitness is an example of a company that raised the price of its black card membership and did not see an initial dip in the percentage rate of new members signing up.

How are companies responding to the shift from goods to services in the economy?

Companies are adapting by focusing on services such as travel, experiences, movies, and dining out, as consumers are increasingly spending in these areas following the easing of COVID-19 restrictions.

What strategies are companies using to maintain market share as their products become more elastic?

Strategies include promoting cost-saving benefits, offering smaller-sized products at lower prices, and leveraging retailers for better shelf space or product presentation to appeal to consumers.

How are supply chain disruptions and consumer demand changes expected to impact future price increases for goods?

Economists expect that the easing of supply chain disruptions and consumer demand will lead to a slowdown in price increases for goods, as companies may not need to pass on as many costs to consumers.

What dilemma are companies facing in deciding whether to raise prices or cut costs?

Companies are grappling with the decision of whether to raise prices, potentially affecting demand, or to cut costs, which could involve layoffs or other measures, in order to maintain competitiveness and profitability.