EconomicsPrice elasticity of demand shows the responsiveness of the quantity of goods and services demanded due to a change in price all determinants of demand being constant such as income. Frank (2008) describes that price elasticity of demand is said to be elastic when the value of price elasticity is greater than one or where the changes of price have a large relative effect on the quantity of goods demanded in the market and inelastic when the effects are relatively small. Price elasticity of demand is also a measure of the sensitivity of quantity demanded in the market according to the changes in price.
Inelastic demand is a situation where the demand of a product does is not affected by the changes in price. Some of the products with inelastic demand include necessities, those with few alternatives and those that tend to display inelastic demand for example the demand for salt, milk, water is relatively inelastic since the change in price the demand relatively equivalent while that of sugar, vacation travel and entertainment is elastic since there are many substitutes for sugar and other services (Frank 2008). TelecommunicationIn telecommunication the relative price elasticity of demand is perfectly elastic for example the reduction of telecommunication charges to increase the total demand of subscribers.
In order to recover huge sunk costs, operators of telecommunications use the inverse elasticity pricing. This involves setting higher prices for the services with least elastic demand. The inverse elasticity rule is used by telecommunication services in order to reduce monopoly pricing and maximising losses. Use of inverse elasticity applies a myopic application and therefore telecommunications adopt the rule at face value (Robert 2005). A telecommunication bundling report shows that about 35 percent of customers are more likely to buy bundles services from an electric provider.
Telecommunications industry use peak and off peak pricing where the price charged varies with time for example there may be three rates for telephone calls such as daytime peak rate, off peak evening rate and at weekends some telecommunications providers make it cheaper. These changes in prices are effective as customers find themselves calling for long hours during peak hours and this shows that the lower the price the higher the quantity demanded.
During off-peak hours telecommunication companies have plenty of spare power and the marginal costs of productions are low. On the other hand, at peak hours the demand is high and this brings about a relatively inelastic short run supply. This is because the suppliers reach capacity constraints. Gillespie (2007) shows the high demand and the rise in costs increase the profit maximization price. There are three major drivers in the telecommunication industry which include macroeconomic growth. The increase in nominal GDP leads to an increase in nominal telephone revenues.
This is because telephone intensity is constant. The other driving factor is telephone intensity which is the secular growth in the use of telephone in an economy. The final factor that drives demand of telecommunication is price elasticity which measures the price-volume relationship. A recent survey also showed that the demand of cellular services increases as a result of decline in prices of handsets, activation fees and deposits given by subscribers. The price elasticity of demand a fall of price of handsets by 10 percent results to 20 percent increase in demand of telephone services (Gillespie 2007).