If a small change in unit price is accompanied by a large change in demand then the item is said to be elastic (responsive to price changes). A knowledge of the price elasticity of his items would enable the retailers to decide upon the unit pricing of various item in the store.
Some of the factors which affect the price elasticity of an item are:
- Availability of substitutes: products for whom the substitutes are easily available tend to be more elastic
- Necessity or Luxury: luxury items tend to have a much more price elasticity compared to necessary item such as petrol etc.
- Proportion of the customers budget: items that tend to consume a large of the consumers budget tend to have a higher price elasticity as the impact on budget is high when the price increases
- Time period considered: price elasticity of items tend to increase with time as customers get more time to adjust their consumption pattern
- Price points: Certain price point changes tend to make the price elasticity of an item more as it is related to the customer sentiment. For example a change of price from Rs. 199 to Rs. 201 would make the item more price elastic compared to when the price increases from Rs. 200 to Rs. 202.