Interpret elasticity coefficients and apply them to marketing decisions – pricing, product‑mix and promotional strategy – in line with Cambridge International Business (9609) 8.1.
| Elasticity | Variable examined | Typical marketing use |
|---|---|---|
| Price Elasticity of Demand (PED) | Quantity demanded ↔ own price | Set price level, decide on price cuts or increases. |
| Cross‑Price Elasticity of Demand (XED) | Quantity demanded of good A ↔ price of good B | Bundle complementary goods or position as a substitute. |
| Income Elasticity of Demand (YED) | Quantity demanded ↔ consumer income | Target high‑income vs. low‑income segments; forecast demand in economic cycles. |
| Price Elasticity of Supply (PES) | Quantity supplied ↔ price | Assess capacity flexibility and short‑run vs. long‑run supply responses. |
| Advertising (Promotional) Elasticity | Quantity demanded ↔ advertising or promotional spend | Determine optimal advertising budget and expected sales lift. |
Company X sells 2 000 units at £10 each. After a price cut to £8, sales rise to 2 800 units.
\[ \begin{aligned} \%\Delta Q &= \frac{2\,800-2\,000}{(2\,800+2\,000)/2}= \frac{800}{2\,400}=0.3333\;(33.33\%)\\ \%\Delta P &= \frac{8-10}{(8+10)/2}= \frac{-2}{9}= -0.2222\;(-22.22\%)\\ \text{PED} &= \frac{0.3333}{-0.2222}= -1.5 \end{aligned} \] Interpretation: \(|\text{PED}| = 1.5 > 1\) → demand is **elastic**; a price cut is likely to raise total revenue.Product A (smartphone case) sells 5 000 units when the price of Product B (screen protector) is £5. When the screen‑protector price rises to £7, case sales increase to 5 600 units.
\[ \begin{aligned} \%\Delta Q_A &= \frac{5\,600-5\,000}{(5\,600+5\,000)/2}= \frac{600}{5\,300}=0.1132\;(11.32\%)\\ \%\Delta P_B &= \frac{7-5}{(7+5)/2}= \frac{2}{6}=0.3333\;(33.33\%)\\ \text{XED}_{A,B} &= \frac{0.1132}{0.3333}=0.34 \end{aligned} \] Interpretation: Positive XED (0 < XED < 1) → the two goods are **weak substitutes**; a price rise in the screen protector lifts case demand modestly.A luxury watch sells 500 units when average consumer income is £30 k. When income rises to £35 k, sales increase to 650 units.
\[ \begin{aligned} \%\Delta Q &= \frac{650-500}{(650+500)/2}= \frac{150}{575}=0.2609\;(26.09\%)\\ \%\Delta Y &= \frac{35-30}{(35+30)/2}= \frac{5}{32.5}=0.1538\;(15.38\%)\\ \text{YED} &= \frac{0.2609}{0.1538}=1.70 \end{aligned} \] Interpretation: YED > 1 → the watch is a **luxury (normal) good**; demand grows faster than income.Manufacturer Z produces 1 200 units of a seasonal fruit when the market price is £4 per kg. After the price rises to £5 per kg, output increases to 1 500 kg.
\[ \begin{aligned} \%\Delta Q_S &= \frac{1\,500-1\,200}{(1\,500+1\,200)/2}= \frac{300}{1\,350}=0.2222\;(22.22\%)\\ \%\Delta P &= \frac{5-4}{(5+4)/2}= \frac{1}{4.5}=0.2222\;(22.22\%)\\ \text{PES} &= \frac{0.2222}{0.2222}=1.0 \end{aligned} \] Interpretation: PES = 1 → supply is **unitary elastic** in the short‑run; producers can increase output proportionally to price changes.Brand Y spends £100 k on advertising and sells 4 000 units. After increasing the budget to £120 k, sales rise to 4 560 units.
\[ \begin{aligned} \%\Delta Q &= \frac{4\,560-4\,000}{(4\,560+4\,000)/2}= \frac{560}{4\,280}=0.1308\;(13.08\%)\\ \%\Delta A &= \frac{120-100}{(120+100)/2}= \frac{20}{110}=0.1818\;(18.18\%)\\ \text{Ad‑Elasticity} &= \frac{0.1308}{0.1818}=0.72 \end{aligned} \] Interpretation: 0 < |E| < 1 → demand is **inelastic** with respect to advertising; large spend generates a proportionally smaller sales lift.| Elasticity value | Interpretation | Implication for marketing |
|---|---|---|
| \(|E| > 1\) | Elastic – quantity changes proportionally more than the variable. | Consider price cuts, penetration pricing or heavy promotion. |
| \(|E| = 1\) | Unitary elastic. | Price moves do not affect revenue; focus on cost control or differentiation. |
| \(0 < |E| < 1\) | Inelastic – quantity changes proportionally less. | Price increases can raise revenue; premium or skimming strategies are viable. |
| \(E = 0\) | Perfectly inelastic. | Very high pricing power – typical of essential or unique products. |
| \(E = \infty\) | Perfectly elastic. | Any price rise eliminates demand – market is highly competitive. |
| \(E < 0\) (XED) | Complementary goods. | Bundle or jointly price complementary products. |
| \(E > 0\) (XED) | Substitute goods. | Position product as a substitute; monitor competitor pricing. |
| \(YED > 0\) | Normal good. | Target higher‑income segments; expect growth in up‑turns. |
| \(YED < 0\) | Inferior good. | Focus on price‑sensitive or lower‑income markets. |
In the short run, consumers have limited ability to find substitutes or change habits, so demand is often less elastic. Over the long run, alternatives become available and preferences evolve, making demand more elastic. Similarly, supply is usually more inelastic short‑term (capacity constraints) and more elastic long‑term as firms can adjust plant and labour.
Case‑study note: A fast‑fashion retailer raised prices after a successful season, assuming demand was inelastic. Ignoring the short‑run limitation, the price hike triggered a swift shift to cheaper rivals, causing a 12 % revenue drop – a classic example of mis‑reading elasticity.
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