the impact of elasticity measures on business decisions

8.1 Marketing Analysis – Elasticity

Objective

Understand how elasticity measures influence business decisions and how to apply them in real‑world scenarios.

What is Elasticity?

Elasticity tells us how much one thing changes when another thing changes. Imagine a rubber band: the more you stretch it, the more it resists. In business, we use elasticity to see how demand reacts to price, income, or other products.

Types of Elasticity

  • Price Elasticity of Demand (PED) – how quantity demanded changes when price changes.

  • Income Elasticity of Demand (YED) – how quantity demanded changes when consumer income changes.

  • Cross‑Price Elasticity of Demand (XED) – how quantity demanded of one product changes when the price of another product changes.

Key Formulae

Price Elasticity of Demand: \$PED = \frac{\% \Delta Q_d}{\% \Delta P}\$

Income Elasticity of Demand: \$YED = \frac{\% \Delta Q_d}{\% \Delta I}\$

Cross‑Price Elasticity of Demand: \$XED = \frac{\% \Delta Q{d1}}{\% \Delta P2}\$

Example: Calculating PED

Suppose the price of pizza rises from \$8 to \$10 (a 25% increase). Quantity sold falls from 200 to 150 (a 25% decrease).

\$PED = \frac{-25\%}{+25\%} = -1.0\$

A PED of -1.0 means demand is unit‑elastic: the percentage change in quantity demanded equals the percentage change in price.

Elasticity Categories

ElasticityInterpretationBusiness Action
|PED| > 1Elastic – demand changes a lot.Lower price to boost sales; avoid price hikes.
|PED| < 1Inelastic – demand changes little.Higher price can increase revenue.
|PED| = 1Unit‑elastic – proportional change.Price changes have no effect on total revenue.

How Elasticity Informs Business Decisions

  1. Pricing Strategy – Use PED to decide whether to raise or lower prices.

  2. Product Mix – YED helps identify whether a product is a normal or luxury good.

  3. Competitive Positioning – XED shows how close substitutes affect demand.

  4. Revenue Forecasting – Combine elasticity with sales data to predict revenue changes.

Exam Tips 📚

  • Show all steps when calculating elasticity – examiners look for clear work.

  • Use real‑world examples (e.g., smartphones, coffee) to illustrate concepts.

  • Remember the sign: PED is usually negative because of the inverse relationship.

  • When asked to advise a company, link the elasticity type to the appropriate pricing or marketing action.