Market Research ELASTICITY

Market Research PED Price elasticity of demand Look at the two demand curves I have drawn, the one labeled D2D2 has a steeper gradient than D1D1 What impact does the slope of the curves have on demand for those two products when price is changed ? Demand has fallen for both products but at different rates even though the price increase is the same. This could be useful info for marketing manager/director as the revenue for A has risen but B has fallen The relationship between price changes and the size of resulting change in demand is known as price elasticity of demand and measures the responsiveness of demand following a change in price.

Market Research PED you can show it on demand curves or as a formula: % change in quantity demanded / % change in price The value of PED is usually negative – why ? Because a fall in price results in a increase in demand Apply this formula to the example given.

Market Research PED What determines price elasticity of demand ? How necessary a product is – the more its deemed necessary by the consumers the less they will react to changes in price. This makes it inelastic. Examples … Salt, Bread, Sugar, Milk Number of similar competitors – the more substitutes there are the more likely consumers will be to switch if there is a rise in price. Examples … Supermarkets, fruit retailers, liqour stores

Market Research PED Degree of consumer loyalty – if through branding you have created strong customer loyalty then they are likely to stick with you through reasonable price increases. Examples … Levis, Suncream, Sportswear, cars The price of the product – a cheap product which doesn’t use up much of your income, is unlikely to have a high elastic demand as you don’t care about a 10% or 15% increase. Examples … Toilet roll, shampoo, toothpaste …

Market Research PED Main uses of PED Why do we use PED ? 1. To make a more accurate sales forecast If you are considering a price increase (to cover production cost increases) then being aware of PED should allow forecasted demand to be calculated 2.Assisting in pricing decisions If a bus company was thinking about changing its pricing structure, being aware of PED of routes is useful – why ? Could raise prices on routes that are inelastic (low PED) and lower them on routes which are elastic (high PED) – also known as … price discrimination.

Market Research PED So price is important in determining the demand for a product but its not the only factor. What else can determine demand ? Change in your income level Increased population or an increase in the age range of target market A change in the price of a substitute good A change in price of a complimentary good A good and effective advertising campaign