Essay: Price elasticity

Price elasticity measures the sensitivity of the quantity demanded or the quantity supplied to the change in the price. In other words, how much will a change in price affect the quantity demanded or supplied? (Taylor, 2010)
According to Ferrell and Hartline (2008) elasticity is defined as the relative impact on the demand for a product, given specific increases or decreases in the price charged for that product.
When calculating price elasticity it will show the effect of a change in price on quantity demanded. (online, 2011)
The formula for calculating the elasticity is as follows:
Price elasticity = % change in quantity / % change in price
Gathering data on how consumers respond to changes in price can help reduce risk and uncertainly. More specifically, knowledge of PED can help the firm forecast its sales and set its price. (online, 2011)
However, some products may be of more value to the customer and this is why elasticity may differ between products. Some products are of fundamental value to people and these products are usually more insensitive to changes in price, due to the fact that they would continue buying these products regardless of the increases in price. (Heakal, n.d.)
Therefore, branding your company or your product creates customer loyalty, which makes market demand less elastic. (Dorward, 2011)
Furthermore, very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand. (Moffatt, Price Elasticity of Demand – Economics – About.com, 2003)
According to N. Gregory Mankiw (2011) goods that have close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others. As well for necessities and luxurious products/goods, where necessities tend to have inelastic demand, whereas luxuries have elastic demands. In his explanation he gives an example of sailboats, and when the price of sailboats rises, the quantity of sailboats demanded falls. The reason for this being is that most people view sailboats as a luxury.
Also Mankiw explains the time horizon for price elasticity, where he states that goods tend to have more elastic demand over longer time horizons. He gives an example with gasoline prices rising, and states that the quantity of gasoline demanded falls only slightly in the first few months. But that after a while people are willing to change to more fuel-efficient cars or use public transportation, in some cases move closer to where they work. Within several years the quantity of gasoline demanded falls more substantially.
Overview for a Bareboat Charter Company on the Adriatic Coast
Based on the information about the SAILS Company we can see that they have a limited number of yachts for rent. As well the demand for larger yachts was growing and the company invested in purchasing larger yachts.
As explained above if the prices were to become higher for renting a yacht the supply would probably drop, because for most people it is seen as a luxury, and the demand would be elastic. As well the company is located near Split where there are more than 30 Charter companies. Due to this most of the potential customer would choose a different company if SAILS would make their prices higher than the competitors.
Further, for the people that enjoy sailing and have been using SAILS yachts for more than a year, two possibilities exist:
‘ The customers are loyal to SAILS and would rather stay and rent yachts from them, then change to another company for which they do not know
‘ The demand would drop slightly on the beginning, however, after a while customers would start switching to other companies, or look for different solutions.