What is Price Sensitivity?

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Price sensitivity refers to the degree to which the quantity demanded of a good or service responds to changes in its price. High price sensitivity means that even a small change in price will lead to a significant change in demand, while low price sensitivity indicates that price changes have little effect on demand. Price sensitivity is typically measured by the Price Elasticity of Demand (PED), given by the formula:Price Elasticity of Demand=Percentage Change in Quantity Demanded/Percentage Change inWhen the price elasticity coefficient is greater than 1, the demand is considered elastic; when it is less than 1, the demand is considered inelastic.

Definition

Price sensitivity refers to the degree to which the demand for a product or service responds to changes in its price. High price sensitivity means that a small change in price will lead to a significant change in demand, while low price sensitivity indicates that price changes have little effect on demand. Price sensitivity is typically measured by the price elasticity of demand, calculated as: Price Elasticity = Percentage Change in Quantity Demanded / Percentage Change in Price. When the price elasticity is greater than 1, demand is considered elastic; when it is less than 1, demand is inelastic.

Origin

The concept of price sensitivity originates from the theory of demand in economics, first introduced by Alfred Marshall in the late 19th century. He elaborated on the importance of price elasticity in his book "Principles of Economics," helping economists understand market behavior and consumer reactions.

Categories and Features

Price sensitivity can be categorized into high sensitivity and low sensitivity. High sensitivity is often found in luxury goods or products with strong substitutes, as consumers are more likely to change their purchasing decisions based on price changes. Low sensitivity is common in necessities or products without substitutes, where consumers continue to buy despite price increases. Pricing strategies for high sensitivity products need to be flexible to adapt to market changes, while low sensitivity products can maintain more stable pricing strategies.

Case Studies

A typical case is Apple's pricing strategy when launching new iPhone models. As iPhones are considered high-end products, their price sensitivity is low, allowing Apple to have significant pricing flexibility without greatly affecting demand. Another example is Walmart's low-price strategy. Walmart's target customers are highly price-sensitive, so the company attracts and retains its customer base by maintaining low prices.

Common Issues

Investors often misunderstand the significance of the price elasticity coefficient when applying the concept of price sensitivity. A common issue is overlooking the impact of changes in market conditions and consumer preferences on price sensitivity. Additionally, relying too heavily on historical data without considering future trends can lead to incorrect market predictions.

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