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Understanding price elasticity

Price elasticity.

It’s such a difficult word, but such a cool concept, and is a great starting point for an interesting discussion with your kid. Here’s how to set it up.

Take any product and ask your kid to guess the price and how many of that product is sold in a year. This is an interesting exercise in reasoning, but not the main point here.

You then ask, “what would happen to the sales if the price was doubled?” Your kid will most likely say that the volume will be reduced as customers may decide on products from competitors or substitutes (or products that solve similar problems for the customer).

Then, you ask what will happen if the price is cut in half. In most instances, the sales will go up.

You now have three price points: the original price and sales volume, the doubled price with a new volume, and the halved price and new volume. You could put this into a graph with price on the Y-axis and units on the X-axis. If you draw the line, you will see that volumes increase when the price is reduced.

How the sales volume changes when prices change is called price elasticity. Some products are sensitive to small changes in price, and some are not.

As your kids now understand the concept, you can ask them what happens to the volume of these products if the price is cut in half or doubled:

  • Nike running shoes
  • Toilet paper
  • Popcorn in movie theaters
  • Milk
  • Legos

A fun counterintuitive point to this general principle is fashion, where sales might go up when prices increase since it may signal quality, design and luxury. Another example is a toothbrush. If a company decides to increase the purchase price to become the most expensive toothbrush available, some customers may think this is the best brush on the market, leading to increased demand.

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