Law of Demand, Price Elasticity & Mixed Bundling

Nov 28, 2014

 

New content this week focusses on some background economic concepts (the law of demand & price elasticity), plus an example of bundling on roasted chicken.

 

The first addition was an entry in the pricing glossary on the law of demand. Basically the law of demand states that, as long as other factors remain the same, there is an inverse relationship between price and demand – the higher the price, the lower the demand.

There are exceptions, and these are discussed. Changes in taste for example can have a profound impact on demand regardless of price. The introduction of new substitutes can also impact demand, once again without any change in price. In each case there are real world examples to illustrate.

Veblen goods are another special exception, and they deserve some special attention. Additional content, specific to Veblen goods, will be added in the near future.

The law of demand needed to be addressed first because the next addition looked at something closely related – Price Elasticity (or Price Elasticity of Demand).

Price elasticity is often the point where the discussion of pricing can start to get a little scary. Suddenly there are formulas and things like “PED” and the discussion starts to seem very theoretical.

Real world examples make everything easier to understand so several examples of price elasticity are included. If you are interested in pricing it is worth spending a few minutes to understand the concept since it will keep coming in your research.

In the case studies section another example of bundling was added. It explains how a special promotion on take out chicken uses mixed bundling to increase sales and profits.



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