the concept of elasticity of demand: price, income and promotional

Elasticity tells us how much the quantity demanded of a product changes when something else changes – price, income or promotions. Think of it as a “sensitivity meter” for customers. 📈

Formula: \$Ed = \dfrac{\% \Delta Qd}{\% \Delta P}\$

Interpretation:

• |E_d| > 1 ➜ elastic – quantity changes a lot when price changes.
• |E_d| < 1 ➜ inelastic – quantity changes little.
• |E_d| = 1 ➜ unit‑elastic – proportional change.

Analogy: Imagine a water balloon (product). If you squeeze it (raise price), it pops (drops in quantity) if it’s elastic, but if it’s thick rubber (inelastic) it barely changes. 🎈

Example:

1. Price rises from £10 to £12 (+20%)
2. Quantity demanded falls from 100 units to 80 units (−20%)
3. \$E_d = \dfrac{-20\%}{+20\%} = -1\$ ➜ unit‑elastic.

Formula: \$Ey = \dfrac{\% \Delta Qd}{\% \Delta I}\$

Interpretation:

• Positive YED ➜ normal good (demand rises as income rises).
• Negative YED ➜ inferior good (demand falls as income rises).
• Large |YED| ➜ luxury good.

Analogy: Think of a student’s snack budget. When parents earn more (income ↑), the student buys more premium snacks (normal good). If the student switches to cheaper chips (inferior good) when money is tight, that’s negative YED. 🍎

Example:

1. Income rises from £1,000 to £1,200 (+20%)
2. Demand for organic coffee rises from 50 to 65 cups (+30%)
3. \$E_y = \dfrac{+30\%}{+20\%} = 1.5\$ ➜ luxury normal good.

Concept: Measures how quantity demanded reacts to a change in promotional activity (e.g., advertising spend, discount rate).

Formula (simplified): \$E{promo} = \dfrac{\% \Delta Qd}{\% \Delta Promo}\$

Analogy: Think of a magnet (promotion) attracting customers (quantity). A strong magnet (high promo elasticity) pulls many customers; a weak magnet (low elasticity) barely changes the crowd. 🧲

Example:

1. Advertising spend increases from £5,000 to £7,500 (+50%)
2. Sales rise from 200 to 280 units (+40%)
3. \$E_{promo} = \dfrac{+40\%}{+50\%} = 0.8\$ ➜ moderately elastic promotional response.

• Always state the formula before calculating.
• Interpret the sign and magnitude of the elasticity.
• Use real‑world examples to illustrate concepts.
• Remember that the percentage change is calculated as:

  \$\dfrac{\text{New Value} - \text{Old Value}}{\text{Old Value}} \times 100\%\$

• When asked to compare goods, note whether one is more elastic than the other.
• For promotional elasticity, consider both advertising spend and discount rate as “promotional variables.”