JLGutierrez A critical mass of consumers acting in a price inelastic fashion could be a key source of inflation remaining stubbornly high. In this article, we will examine the factors that have likely led to inelastic consumer behavior and discuss why we believe this is starting to reverse. As price elasticity is restored, I anticipate inflation returning to a healthier 2% or lower.
We will begin by reviewing the economic concepts as to how price elasticity influences inflation, and follow with data suggesting a recent swell of price inelasticity. Finally, we will show data hinting that price elasticity is starting to come back and discuss the investment implications. How a business sets its price of a good or service There are 2 key points to consider: The revenue maximizing price The profit maximizing price.
Revenue for a given product is maximized at the point where marginal revenue of price increase equals zero. Consider this in the context of a normal demand curve. 2MC Revenue is the product of price (P) and quantity (Q) of units sold.
Assuming normal elasticity, each increase in price results in a decrease in the quantity of units sold. So it becomes an area under curve calculation in which price increases up to a certain point will increase the product of Q times P. Beyond a certain point, the reduction in quantity sold hurts the product of Q times P more than the increase in price helps.
The revenue maximizing point is the minimum price a rational business could reaso.