What is 'Choke Price'

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.

BREAKING DOWN 'Choke Price'

The choke price is reached when the price rises to the level at which demand for that item (or commodity – the term is often used in commodities trading) reaches zero. The choke price is the exact point at which demand ceases. Buyers are also not interested in anything with a higher price, but the choke price is the lowest price at which there is zero demand. Financial analysts use the choke price to analyze demand and supply.

Most often, a choke price is associated with natural resources. For example, economists may discuss the price per barrel of oil at which consumers simply no longer buy oil. Colloquially, a choke may refer to a price at which demand drops, but a choke price isn't reached until there is no demand at all.

By using a demand schedule and/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.

How a Shift in Demand Affects Choke Price

Suppose that the consumers’ income rises. This causes demand for a normal good to rise. Demand typically becomes less elastic as well. This is a situation in which a a firm should consider raising its prices. For example: with linear demand, an increase in income causes the demand curve for a normal good to shift to the right without changing its slope. Thus, the choke price rises and demand becomes less elastic; volume goes up at as well. Whether the firm has constant or increasing marginal cost, it should increase its price.

How a Price Increase Affects Choke Price

A price increase on a complementary good will usually lower demand for the complementary good. Such an increase usually makes demand for the firm’s good more elastic. For example: 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. Thus, the choke price falls and demand becomes more elastic.

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