This summary contains information from Chapter 21. It focuses on :
Elasticity of demand
Price elasticity of demand
Income Elasticity of demand
Promotional elasticity of demand
The summary contains the definitions, formulas, the meaning of the results and the impact it has on the business.
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Marketing analysis - chapter 21
21.1 Elasticity of demand
● Marketing decisions have to be based on up-to-date and relevant information
as possible
● Marketing departments try to assess the impact on demand of these 3
variables:
○ The price of the product
○ Promotional spending
○ Consumer income levels
● The elasticity of demand is a form of measurement that was developed to
help assess these variables
Price elasticity of demand
Demand curve for product A Demand curve for product B
● D2-D2 has a steeper gradient than D1-D1, even though they had the same
increase in price, the reduction of in demand is greater for product B than it is
for product A
● The slope shows how demand will change according to price vs the quantity
demanded per week
● This is important because it shows the manager that the total revenue for
product A has increased but product B’s has fallen as the shaded area shows
on the graph
● This relationship between price changes and the size of the resulting change
in demand is known as price elasticity of demand (PET)
● Product A’s demand is less elastic or less responsive to price change than B’s
PED: a measure of the responsiveness of demand for a product, following a change
in price
, PED: a measure of the responsiveness of demand for a product, following a change
in price
Interpreting price elasticity results
0:
● Perfectly inelastic demand
● The same amount is demanded, no matter what the price is
● In reality, no product has this
Between 0 and 1:
● Inelastic demand
● The percentage change in demand is less than the percentage change in
price
● If a product has this price elasticity of demand, a price increase will lead to a
smaller proportionate change in demand and revenue will rise
● However, if the price continues to rise, the demand will become more elastic
Unitary:
● Unit elasticity
● The percentage change in demand is equal and opposite to the percentage
change in price
● Any price change will lead to an equal change in demand and the total
revenue will remain constant
● When PED equals 1, sales revenue will be maximised
Between 1 and infinity
● Elastic demand
● The percentage change in demand is greater than the percentage change in
price
● If the price is reduced, there will be a greater proportionate increase in
demand and revenue will increase
Infinity
● Perfectly elastic demand
● An infinitely large amount is demanded at one price and then demand falls to
0 once the price is raised
● There is no product that would have this PED
● The value of PED is usually negative because a fall in price usually results in
a rise in demand, this is called an inverse relationship
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