Price Elasticity of Demand

Jul 16, 2024

Marketing Concept: Price Elasticity of Demand (PED)

Introduction

  • Price Elasticity of Demand (PED): Measures how sensitive or responsive demand is to a change in price.
  • Key Variables: Price and Income.
    • This lecture focuses on the price.

Key Concepts

  • Elasticity: About the sensitivity or responsiveness of demand to a change in a variable.
  • PED Formula:
    • Calculated as the percentage change in quantity demanded divided by the percentage change in price.

Example: Product X

  • Original Price: £4 per unit.
  • Quantity Demanded: 1,000 units.
  • New Price: £5 per unit (price increased by £1).
  • New Quantity Demanded: 800 units.

Calculations

  1. Percentage Change in Demand:

    • Fall of 200 units from 1,000 units.
    • (200/1000) * 100 = 20% decrease.

  2. Percentage Change in Price:

    • Increase of £1 from £4.
    • (1/4) * 100 = 25% increase.

  3. PED Calculation:

    • PED = 20% / 25% = 0.8

Interpretation of PED

  • Elastic Demand (PED > 1):
    • Change in demand is higher than the change in price.
  • Inelastic Demand (PED < 1):
    • Change in demand is less than the change in price.
  • Unitary Price Elasticity (PED = 1):
    • Change in price and demand are the same.

Business Implications

  • Elastic Products (PED > 1):
    • Increasing price leads to a greater percentage fall in demand, potentially reducing revenue.
  • Inelastic Products (PED < 1):
    • Increasing price leads to a smaller percentage fall in demand, potentially increasing revenue until a certain price point.

Factors Influencing Price Elasticity

  • Brand Loyalty: Strong brands tend to be price inelastic.
  • Necessity: Essential products tend to be price inelastic.
  • Habitual Consumption: Products consumed out of habit tend to be price inelastic.
  • Substitutes: Products with many alternatives tend to be price elastic.

Examples

  • Price Elastic (PED > 1):
    • Products with many alternatives (e.g., different brands of candy bars, bread, newspapers).
  • Price Inelastic (PED < 1):
    • Habitual products (e.g., tobacco).
    • Essential services (e.g., season tickets, subscriptions).

Conclusion

  • PED Calculation:

    • Helps in understanding how price changes affect demand.
    • Important for businesses to optimize pricing strategies.

  • Remember:

    • Calculate percentage changes in demand and price.
    • Evaluate PED to determine if a product is elastic, inelastic, or unitary.