Elasticity

Understanding Elasticity

  • Elasticity measures how demand changes in response to changes in price.
  • It aids in informing pricing strategies and optimising revenue.
  • The degree of elasticity can categorise goods as elastic, inelastic or unitary
  • Elastic goods see a significant change in demand with price changes. They usually have readily available substitutes.
  • Inelastic goods are those wherein demand is relatively unaffected by price changes. They are typically necessities or goods with no near substitutes.
  • Goods with unitarity elasticity experience proportional changes in demand and price.

Types of Elasticity

  • Price elasticity of demand (PED): Measures how demand responds to changes in price.
  • Income elasticity of demand (YED): Measures how demand changes in response to changes in consumer income.
  • Cross elasticity of demand (XED): Measures how the demand for one good changes when the price of another good changes.

Calculating Elasticity

  • The basic formula for elasticity is % change in quantity demanded / % change in price.
  • If the result is a coefficient greater than 1, the good is elastic. If it is less than 1, the good is inelastic. And if it’s equal to 1, the good has unit elasticity.

Implications of Elasticity for Marketing Decisions

  • Elasticity informs proactive pricing decisions. For elastic goods, minor price changes can impact demand significantly, leading to corresponding pricing strategies.
  • Inelastic goods permit greater pricing flexibility as changes in price have a less significant impact on demand.
  • Knowledge of income elasticity helps businesses predict demand fluctuations during economic change.
  • Cross elasticity offers valuable insights about competitive dynamics and substitutability of products.

Factors Influencing Elasticity

  • Availability of substitutes: A good with more substitutes will tend to be more elastic.
  • Degree of necessity: Essential goods tend to be inelastic, while luxury goods are usually elastic.
  • Consumer income levels: Goods and services that are large chunks of consumers’ income are likely elastic.
  • Duration: The longer the time period considered, the more elastic goods are likely to be as consumers have more time to adjust behaviour.

Remember, understanding and utilising elasticity can enable businesses to better align pricing and marketing strategies with consumer response, taking into account external influences and market dynamics.