Choke price is an economic term used to describe the lowest price at which the quantity demanded of a good is equal to zero. At any price below the choke price, consumers will demand some quantity of the good. At any price equal to or above the choke price, consumers will not express any demand for the good.
- The choke price is the exact price level where demand for a product stops and becomes zero.
- As pricing nears the choke price, consumers start to search for alternatives.
- The choke price is most often referenced in terms of commodities and natural resources.
- In times when demand is high, companies want to price their goods nearer to the choke price to fully realize the market opportunity.
Understanding the Choke Price
In basic terms, the choke price is the price that no one is willing to pay for the good in question. The choke price is the exact point at which demand ceases, making it an economically significant data point for understanding the dynamics of demand for that product. Buyers are, of course, equally uninterested in any of the higher possible prices for the good, but the choke price is the lowest price at which there is zero demand. Financial analysts often use the choke price to analyze supply and demand.
The choke price is most commonly used to refer to commodity pricing, but it applies to any good. There are choke prices related to oil, natural gas, electricity, and so on. As the price nears the choke price, it encourages more buyers to look at substitutes and alternatives. The term choke price may also be applied to price points where demand drops faster than expected, but this is an informal usage rather than the correct economic one as demand is lower but still exists.
By using a demand schedule or demand curve, a company can see where the choke price is as well as the differences in the quantity of a good that consumers will demand at different prices. For example, consumers might purchase 200 units of a good at $40, 1,000 units of a good at $20 and 2,500 units at $10, but zero units at $50. Therefore, $50 would be the choke price. In practice, the choke price is almost never reached as consumer flight alternative products tends and a pricing reaction from the producer of the primary product work to prevent a true zeroing out of demand.
How a Shift in Demand Affects Choke Price
Shifts in demand have a direct impact on the choke price. Imagine that consumers see a rise in income. This extra income can cause demand for a normal good to rise. Demand typically becomes less elastic in this situation as well, so a firm should consider raising its prices. With linear demand, an increase in income causes the demand curve for a normal good to shift to the right without changing its slope. So the choke price rises and demand becomes less elastic, and the volume goes up as well. Regardless of whether the company has constant or increasing marginal cost, it should probably increase its price to capture the market opportunity fully.
How a Price Increase Affects Choke Price
Similarly, price increases can have a lowering effect on the choke price. A price increase on a complementary good will usually lower demand for the complementary good. Such an increase usually makes the demand for the firm’s good more elastic. With linear demand, an increase in the price of a complementary good causes the demand curve to shift to the left without changing in slope. So the choke price falls, and demand becomes more elastic, meaning a company has to be flexible on the pricing downside to be competitive.