Tiny MBA #15: Price Elasticity and Pies

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Welcome to today’s Tiny MBA topic: Price elasticity.

Definition: Price elasticity

Price elasticity is how much more (or less) of something people will buy if the price goes down (or up).

Example: Blueberry pies

Say you’ve been baking up a storm, making dozens of very delicious blueberry pies.

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Illustration by Madeleine Kelly

You set up a stand on the street and start selling those pies for a really high price: $20 a pie. People walk by and tell you the pies smell and look great but the price is a little high. One or two people buy a single pie.

Now you try dropping the price way down, to $5 per pie. Suddenly they’re selling like crazy. Everyone who walks by gets two, maybe three. One person buys ten.

This proves that demand for great blueberry pies is highly ‘elastic’ – people will buy much more when the price is lower, and much less when the price is higher. Why “elastic?” Because the demand “stretches” from low to high as the price “stretches” from high to low.

But isn’t that true of everything?

As it turns out, not really. There are some things people can’t (or don’t want to) consume that much of, so no matter how much the price drops, they won’t buy that many more of them. Things like paper towels, toilet paper, or rubber bands.

For these products, demand is said to be “inelastic” – it doesn’t change (stretch) much even if the price changes (stretches) a lot.

Why is price elasticity important? It’s an obscure concept that only economists really study.

But as a business person, it can be very useful to observe when you’re selling something.

For example: next time you’re selling baked goods, maybe sell two types (e.g. chocolate chip cookies and cupcakes). Try changing the prices on each of them separately to see whether demand is more “elastic” (responsive to price) for one than the other. You might be surprised!

Tiny MBA is my occasional series of short stories illustrating business concepts for kids.

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