calculation of price, income and promotional elasticity of demand

8.1 Marketing Analysis – Elasticity

What is Elasticity? 🤔

Elasticity measures how much the quantity demanded of a product changes when a factor (price, income, or promotion) changes. Think of it like a rubber band: the more elastic, the more it stretches for a small push. 📏

Price Elasticity of Demand (PED) 📉

The % change in quantity demanded divided by the % change in price.

\$PED = \frac{\% \Delta Q_d}{\% \Delta P}\$

  1. Find the initial price and quantity.

  2. Find the new price and quantity after the change.

  3. Calculate the percentage changes:

    • \$\% \Delta P = \frac{P{\text{new}}-P{\text{old}}}{P_{\text{old}}} \times 100\$

    • \$\% \Delta Qd = \frac{Q{\text{new}}-Q{\text{old}}}{Q{\text{old}}} \times 100\$

  4. Divide the two percentages to get PED.

Interpretation:

  • |PED| > 1 : Demand is elastic (big reaction to price).

  • |PED| < 1 : Demand is inelastic (small reaction).

  • |PED| = 1 : Unit‑elastic.

ScenarioInitial Price (P₀)New Price (P₁)Initial Qty (Q₀)New Qty (Q₁)PED
Candy price drop$1.00$0.80100 units150 units1.5
Premium coffee price rise$5.00$6.00200 units180 units-0.5

Income Elasticity of Demand (YED) 💰

\$YED = \frac{\% \Delta Q_d}{\% \Delta I}\$

  1. Measure the change in consumer income.

  2. Measure the resulting change in quantity demanded.

  3. Calculate the percentage changes and divide.

Interpretation:

  • YED > 0 : Normal good (demand rises with income).

  • YED > 1 : Luxury good (demand rises more than income).

  • 0 < YED < 1 : Necessity (demand rises but less than income).

  • YED < 0 : Inferior good (demand falls as income rises).

ScenarioInitial Income (I₀)New Income (I₁)Initial Qty (Q₀)New Qty (Q₁)YED
Students buying textbooks$30,000$32,000500 units520 units0.8
Luxury cars$50,000$55,000200 units240 units2.0

Promotional Elasticity of Demand (PED) 📣

Measures how quantity demanded changes when promotional effort (e.g., advertising spend, discount rate) changes.

\$PE = \frac{\% \Delta Qd}{\% \Delta P{\text{promo}}}\$

  1. Record the initial promotional spend and sales.

  2. Increase the spend and record new sales.

  3. Compute the percentage changes and divide.

Interpretation:

  • PE > 1 : Demand is highly responsive to promotion.

  • PE < 1 : Demand is less responsive.

ScenarioInitial Promo Spend (P₀)New Promo Spend (P₁)Initial Sales (Q₀)New Sales (Q₁)PE
Social media campaign for sneakers$10,000$15,0001,000 units1,500 units1.5
Email discount for coffee$2,000$2,2003,000 cups3,100 cups0.5

Quick Summary ??

  • Price Elasticity: How much buyers change quantity when price changes.

  • Income Elasticity: How much buyers change quantity when their income changes.

  • Promotional Elasticity: How much buyers change quantity when promotion changes.

Remember: the higher the absolute value, the more responsive the demand. Use these tools to decide pricing, target markets, and marketing budgets. 🚀