interpretation of elasticity results

📊 8.1 Marketing Analysis – Elasticity

What is Elasticity?

Elasticity measures how much one variable changes in response to a change in another variable. In marketing we usually look at how the quantity demanded of a product reacts to changes in price, income or the price of other goods.

The basic formula is:

\$E = \dfrac{\% \Delta \text{Quantity}}{\% \Delta \text{Price}}\$

If you want to see the full derivation:

\$E = \frac{\Delta Q / Q}{\Delta P / P}\$

Types of Elasticity

TypeFormulaInterpretation
Price Elasticity of Demand (PED)\$Ed = \dfrac{\% \Delta Qd}{\% \Delta P}\$How sensitive buyers are to price changes.
Income Elasticity of Demand (YED)\$Ey = \dfrac{\% \Delta Qd}{\% \Delta I}\$How demand changes when income changes.
Cross‑Price Elasticity of Demand (XED)\$E{xy} = \dfrac{\% \Delta Qx}{\% \Delta P_y}\$How demand for one product reacts to the price of another.

Interpreting Elasticity Values

Elasticity ValueMeaningBusiness Implication
\$|E| > 1\$Elastic – quantity changes more than price.Price cuts boost sales volume; price hikes reduce sales significantly.
\$|E| = 1\$Unit‑elastic – quantity changes proportionally to price.Total revenue stays roughly the same when price changes.
\$|E| < 1\$Inelastic – quantity changes less than price.Price increases can raise revenue; price cuts may hurt revenue.

Practical Example: Soda Sales

Imagine a soda company that sells 10,000 cans per month at £1.00 each. A 10% price increase (to £1.10) leads to a 5% drop in quantity sold (to 9,500 cans).

  1. Calculate the percentage change in quantity: \$\% \Delta Q = \frac{9,500 - 10,000}{10,000} \times 100 = -5\%\$.

  2. Calculate the percentage change in price: \$\% \Delta P = \frac{1.10 - 1.00}{1.00} \times 100 = 10\%\$.

  3. Compute PED: \$E_d = \frac{-5\%}{10\%} = -0.5\$.

Interpretation: \$|E_d| = 0.5 < 1\$, so demand is inelastic. The company can raise prices slightly to increase revenue.

Quick Tips for Students

  • Always keep the sign in mind – negative for demand, positive for supply.

  • Use emojis to remember: 📈 for elastic (big change), 📉 for inelastic (small change).

  • When in doubt, think of a real product: luxury cars are usually elastic, basic groceries are inelastic.

  • Remember that elasticity can change over time – keep data updated!

Quiz Yourself

1️⃣ If a product’s price drops by 20% and quantity demanded rises by 40%, what is the PED?

2️⃣ What does a positive cross‑price elasticity indicate about two products?

Answer these to test your understanding before moving on to the next topic!