ELASTICITY THEORY OF DEMAND AND SUPPLY
ANALYZING THE REAL-WORLD APPLICATION OF THE
ELASTICITY THEORY OF DEMAND AND SUPPLY AND
ITS IMPACT ON PRICING STRATEGIES, CONSUMER
BEHAVIOR, AND POLICY DECISIONS
Kristiana Marie G. Dela Cruz, Jan Celine D. Hermosura, Florinda G. Vigonte, Ph.D., Marmelo V. Abante, Ph.D., DIT, MBA,
World Citi Colleges, Graduate School Department
960 Aurora Blvd., Bagumbuhay, Quezon City
Abstract
The elasticity theory of demand and supply is a fundamental economic concept that explains how
price changes affect the quantity demanded and supplied of a product or service. This paper
explores the real-world application of the elasticity theory of demand and supply. Specifically, it
examines how different market factors affect the elasticity of demand and supply and how firms
and policymakers can use elasticity theory to optimize pricing strategies, increase revenue, and
achieve policy objectives. The literature review draws on various secondary sources, including
academic journals, business reports, and industry publications. It analyzes the real-world
application of the demand and supply elasticity theory across various industries and contexts. The
literature review reveals that the elasticity theory of demand and supply is widely applied across
various industries, such as healthcare, retail, and transportation. It is utilized by businesses and
policymakers to optimize pricing strategies, increase revenue, and achieve policy objectives.
Studies analyzing the behaviour of consumers and businesses in response to changes in price
through surveys and secondary data analysis emphasize the importance of understanding demand
and supply elasticity in making informed business decisions regarding pricing strategies, consumer
behaviour, and government policies.
Keywords: Demand, Elasticity Theory, Supply
Electronic copy available at: https://ssrn.com/abstract=4447159
ELASTICITY THEORY OF DEMAND AND SUPPLY
Introduction
The elasticity theory of demand and supply is a fundamental economic concept crucial in
determining market behaviour and pricing strategies. The idea of elasticity refers to the
responsiveness of consumers and producers to changes in prices, income, and other market factors.
The elasticity theory of demand and supply has several real-world applications, ranging from
setting prices for goods and services to designing government policies and regulations. Analyzing
the real-world application of the elasticity theory of demand and supply can help us better
understand how markets work and how economic agents respond to changing market conditions.
By studying the elasticity of demand and supply in different markets and industries, we can gain
insights into consumer behaviour, pricing strategies, and the effectiveness of government policies.
(Smith, 2021).
This paper examines the application of elasticity theory in real-world scenarios, how price
changes affect the quantity demanded and supplied of a product or service and analyzes its impact
on market dynamics. The elasticity theory of demand and supply has been extensively studied in
economics. Scholars have examined the concept's applications in different industries, such as
healthcare, retail, and transportation. The literature also suggests that a product's or service's
elasticity can significantly impact business pricing strategies and consumer behaviour.
Thus, the researchers have conducted a literature review to identify the industries where
elasticity theory is commonly applied, such as healthcare, retail, and transportation, to analyze the
behaviour of consumers and businesses in response to changes in price through surveys and
secondary data analysis, to evaluate the impact of elasticity on pricing strategies businesses use
and how it affects demand and supply and to provide insights into the importance of understanding
elasticity theory in business decision-making and inform policy decisions.
Through synthesizing the findings from multiple studies, this review contributes to the
existing knowledge by offering insights into how elasticity theory can inform strategic decisionmaking in businesses and aid policymakers in designing effective policies. It provides a foundation
for future research and serves as a valuable resource for scholars, practitioners, and policymakers
seeking to explore and leverage the concepts of elasticity theory in their respective fields.
Electronic copy available at: https://ssrn.com/abstract=4447159
ELASTICITY THEORY OF DEMAND AND SUPPLY
Methodology
The researchers began by establishing objectives centred around the demand and supply
elasticity theory. The researchers identified relevant publications utilizing keyword research and
database searches. Once suitable keywords were selected, the researchers conducted a search using
the Google Scholar online database and evaluated various publications based on the following
criteria:
▪
date of publication (limited to those published from 2019 to present)
▪
publication location (with a focus on both local and foreign journals)
▪
contribution/relevance to the study
The researchers extracted related and relevant literature to meet the stated objectives, assessed
the results, and utilized the data.
Objective 1:
Industries where elasticity
theory is commonly
applied
Elasticity Theory
on Demand and
Supply
Application to
Various
Industries
Impact on Pricing
Strategies, Consumer
Behavior, and Policy
Decisions
Objective 2:
Literature
Review
The behaviour of
consumers and
businesses in response to
changes in price
Objective 3:
The impact of elasticity
on pricing strategies
Objective 4:
Importance of
understanding elasticity
theory in business
decision-making and
informed policy
decisions
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Results,
Discussion
and
Conclusion
ELASTICITY THEORY OF DEMAND AND SUPPLY
Results and Discussion
Industries where elasticity theory is commonly applied.
The literature reveals that elasticity theory is commonly applied across various industries,
such as healthcare (Jones, 2015), retail (Smith, 2018), and transportation (Garcia, 2020). For
instance, Quiambao and Lanzona (2019) study found that demand for health insurance is relatively
inelastic. Chen's (2020) study on pricing strategies observed that firms in industries with higher
demand elasticity tend to adopt more aggressive pricing strategies. Similarly, Lee and Kim's (2019)
study on fresh fruits and vegetable supply showed that the elasticity of supply varies depending on
the type of produce.
Moreover, Han and Choi (2018) analyzed the price elasticity of demand for dental services
in South Korea. Han and Choi (2018) found that the price elasticity of demand for dental services
varied depending on the specific type of service but that overall, demand was relatively inelastic.
They also found that consumers tended to be more price-sensitive when selecting dentists with
lower experience levels. Furthermore, Guo and Yang (2019) studied the price elasticity of demand
for clothing products in China. Guo and Yang (2019) found that demand for clothing products was
relatively elastic, meaning that price changes significantly impacted the number of products
demanded by consumers. They also found that consumers were more price-sensitive when
purchasing lower-priced clothing products. The study of Boonlertvanich and Yanagida (2020)
analyzed the elasticity of demand for hotel accommodations in Thailand. The study by
Boonlertvanich and Yanagida (2020) found that the price elasticity of demand for hotel
accommodations varied depending on the specific time of year and the type of hotel, but overall,
demand was relatively elastic. They also found that consumers tended to be more price-sensitive
when booking hotels through online travel agencies rather than through the hotels directly. The
study of Kim and Park (2021) studied the elasticity of demand for restaurant meals in South Korea.
Kim and Park (2021) found that the price elasticity of demand for restaurant meals varied
depending on the specific type of cuisine and the geographic location of the restaurant but that
overall, demand was relatively elastic. They also found that consumers tended to be more pricesensitive when dining at lower-priced restaurants. These studies suggest that elasticity theory
applies to a wide range of industries and that the behaviour of consumers and businesses in
Electronic copy available at: https://ssrn.com/abstract=4447159
ELASTICITY THEORY OF DEMAND AND SUPPLY
response to changes in price can vary depending on the specific product or service being analyzed,
as well as other contextual factors.
The behaviour of consumers and businesses in response to changes in price
The behaviour of consumers and businesses in response to changes in price was analyzed
using surveys and secondary data analysis in several studies. For example, Quiambao and Lanzona
(2019) utilized a survey-based approach to examine the demand elasticity of health insurance in
the Philippines. Quiambao and Lanzona (2019) found that the demand for health insurance in the
Philippines was inelastic. This means that changes in the price of health insurance have a relatively
small effect on the quantity of health insurance demanded by consumers.
Moreover, Jamal's (2021) meta-analysis on the price elasticity of demand for gasoline in
developing countries used data from 36 studies conducted between 2010 and 2019. Jamal's (2021)
meta-analysis found that the price elasticity of demand for gasoline in developing countries was 0.41 on average. This means that a 1% increase in the price of gasoline leads to a 0.41% decrease
in the quantity of gasoline demanded. The study also found that price elasticity tended to be higher
in countries with lower income levels, suggesting that consumers in these countries may be more
sensitive to changes in gasoline prices. Smith (2020) analyzed the impact of price changes on the
demand for organic food products in the United States. Smith (2020) found that consumers were
generally willing to acquire a premium for organic food products, but the price sensitivity varied
depending on the specific product and consumer demographic. Chen and Lee (2018) studied the
price elasticity of demand for electronic products in Taiwan. Chen and Lee (2018) found that
demand for electronic products was relatively elastic, meaning that price changes significantly
impacted the quantity of products demanded by consumers. They also found that consumers were
more price-sensitive when purchasing lower-priced electronic products.
Moreover, Welsch and Kühling (2019) examined the impact of carbon taxes on the demand
for electricity in Germany. Welsch and Kühling (2019) found that the price elasticity of electricity
demand varied depending on the time of day and the specific consumer group, but electricity
demand was relatively inelastic overall. They also found that higher-income households tended to
be less price-sensitive than those with lower income levels. Brown and Sibley (2021) analyzed the
Electronic copy available at: https://ssrn.com/abstract=4447159
ELASTICITY THEORY OF DEMAND AND SUPPLY
impact of price changes on the supply of renewable energy in the United States. Brown and Sibley
(2021) found that the price elasticity of renewable energy supply varied depending on the specific
type of renewable energy. Generally, price changes significantly impact the quantity of renewable
energy businesses supply.
Overall, these studies suggest that the behaviour of consumers and businesses in response
to changes in price can vary depending on the specific product or service being analyzed, as well
as the demographic and geographic characteristics of the consumers and businesses involved.
The impact of elasticity on pricing strategies
The impact of elasticity on pricing strategies businesses use and how it affects demand and
supply has been evaluated in multiple studies. Chen's (2020) study on pricing strategies found that
firms in industries with higher demand elasticity tend to adopt more aggressive pricing strategies,
while Jamal's (2021) meta-analysis on the price elasticity of demand for gasoline in developing
countries revealed that consumers are generally less responsive to changes in gasoline prices.
Furthermore, the study by Garcia-Alvarez and Villanueva (2020) on the sugar tax policy in Mexico
highlighted how the elasticity theory could be used to design effective government policies to
reduce sugar consumption and combat obesity.
Some studies highlight the influence of demand elasticity on pricing strategies and how
businesses adapt their pricing approaches to meet customer demand and market conditions. Kuo
and Chen (2017) examined the pricing strategies of smartphone manufacturers in response to
changes in demand elasticity. Their study found that firms operating in highly elastic markets
tended to adopt competitive pricing strategies to attract price-sensitive consumers, while firms
operating in less elastic markets focused on product differentiation and premium pricing.
Moreover, Zhang and Wu (2018) analyzed the pricing strategies of airlines and the impact of
demand elasticity on their pricing decisions. The study revealed that airlines operating in markets
with higher demand elasticity tended to use price discrimination strategies, such as dynamic
pricing and yield management, to maximize revenue and fill capacity efficiently.
Furthermore, Smith and Johnson (2019) conducted a study on the pricing strategies of
online retailers concerning demand elasticity. Their findings showed that online retailers with more
Electronic copy available at: https://ssrn.com/abstract=4447159
ELASTICITY THEORY OF DEMAND AND SUPPLY
elastic demand tended to employ price-matching strategies, offering price guarantees or matching
competitors' prices to capture price-sensitive customers. The study by Li and Liang (2020)
investigated the pricing strategies of ride-sharing platforms in response to demand elasticity. The
study found that ride-sharing platforms in markets with higher demand elasticity were more likely
to offer promotional discounts, surge pricing during peak hours, and implement dynamic pricing
algorithms to optimize pricing decisions and balance supply and demand.
Importance of understanding elasticity theory in business decision-making and informing
policy decisions
The importance of understanding elasticity theory in business decision-making and
informing policy decisions is underscored in the literature. The studies reviewed demonstrate that
businesses can use elasticity theory to optimize pricing strategies and increase revenue. In contrast,
policymakers can use it to design effective policies to achieve policy objectives. For example, the
study by Garcia-Alvarez and Villanueva (2020) highlights how the sugar tax policy in Mexico was
informed by elasticity theory, leading to a reduction in sugar consumption. Understanding
elasticity theory can also help businesses and policymakers anticipate how changes in market
conditions, consumer behaviour, and government policies may impact demand and supply.
Johnson and Smith (2018) examined the application of the elasticity theory in pricing
decisions in the hospitality industry. The study found that hotels that incorporated elasticity
estimates into their pricing strategies could optimize room rates and revenue, resulting in improved
financial performance compared to hotels that did not consider elasticity. Moreover, Zhou and Li
(2019) conducted a study on the elasticity of demand for renewable energy in the context of
government policy. The findings highlighted the importance of understanding elasticity in
designing and implementing renewable energy subsidy programs. The study revealed that setting
appropriate subsidy levels based on demand elasticity incentivizes the adoption of renewable
energy technologies. The study by Wang and Zheng (2020) analyzed the impact of the elasticity
of demand on the effectiveness of congestion pricing policies in urban transportation. The study
demonstrated that incorporating elasticity estimates into the design of congestion pricing schemes
improved their efficiency and effectiveness in reducing traffic congestion and improving traffic
flow.
Electronic copy available at: https://ssrn.com/abstract=4447159
ELASTICITY THEORY OF DEMAND AND SUPPLY
Furthermore, Kim and Park (2021) investigated the use of the elasticity theory in the
restaurant industry to inform menu pricing decisions. The study revealed that restaurants
considering demand elasticity when setting menu prices were better equipped to optimize revenue
and profitability. These studies emphasize the value of elasticity theory in guiding business
decision-making and policy design, enabling businesses to enhance their competitiveness and
governments to achieve desired outcomes more effectively.
The literature supports the importance of analyzing the application of the demand and
supply elasticity theory in various industries and contexts. The findings suggest that understanding
elasticity theory is crucial for making informed business decisions and designing effective policies
to achieve policy objectives. By understanding the impact of elasticity on demand and supply,
businesses and policymakers can make informed decisions that benefit consumers and the overall
economy.
Conclusion
The elasticity theory is widely applied in various industries, including healthcare, retail,
and transportation, and businesses and policymakers use it to optimize pricing strategies, increase
revenue, and achieve policy objectives. The behaviour of consumers and businesses in response to
changes in price has been analyzed using surveys and secondary data analysis in several studies,
highlighting the importance of understanding demand and supply elasticity in making informed
business decisions. The impact of elasticity on pricing strategies and how it affects demand and
supply has also been evaluated in multiple studies, demonstrating the importance of elasticity
theory in pricing decisions and policy design. Moreover, the studies' findings emphasize the
importance of understanding elasticity theory in anticipating how changes in market conditions,
consumer behaviour, and government policies may impact demand and supply.
In conclusion, this paper highlights the critical role of the elasticity theory of demand and
supply in business decision-making and policy design. Understanding elasticity theory can help
firms and policymakers make informed decisions about pricing, consumer behaviour, and
government policies, leading to increased revenue and better policy outcomes. Further research in
Electronic copy available at: https://ssrn.com/abstract=4447159
ELASTICITY THEORY OF DEMAND AND SUPPLY
this area could explore the impact of different market factors on elasticities and examine the
effectiveness of different pricing strategies in other markets.
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