The Marketing Mix
Price
Price – Elasticity of Demand…
Today you will know what elasticity of demand
means.
You will understand how to calculate price elasticity
of demand
You will be able to apply your understanding to the
case study.
Price Recap…
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Price is the money paid when goods or services
are exchanged.
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It is the only part of the marketing mix that generates
revenue (product, promotion and place are all about
marketing costs).
Setting the right price is therefore an important part
of effective marketing.
Many consumers are concerned about the price of
products and services;

as a result businesses must make sure that the price
they charge is at a level that the consumers are
prepared to pay.
Influences on Price…
Price is effected by many factors, these include:

Market Conditions
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i.e. what is happening to influences consumers
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Business Objectives
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Production Costs
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Market Structure
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i.e. level of competition
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Taxes and Subsidies
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Marketing Mix
Case Study: Influences on Price…
Analyse the factors that influence the price of the BMW Mini.
(8 marks)
Less than four years after the new Mini was launched, German car maker BMW has announced £100m of new
investment. The investment aims to raise output by 20%: production could exceed 200,000 cars by 2007, from
189,000 last year. The increase is in response to rapidly-rising demand and could help wipe out waiting lists.
Raised targets
The ‘Mini’ brand was one of the few parts of the former Rover group to be retained by BMW following its takeover
in 1994. The ‘Mini’ was seen as a valuable brand by BMW and they developed the brand following the introduction of
the new mini in 2001.
Since its launch during summer 2001, the new Mini has gone from strength to strength. Last year, almost one in six
cars sold by the BMW group was a Mini. The company admits that the success of the brand came despite some
reservations from those in the industry. BMW’s decision to produce a new Mini was not received well initially. They
said they would produce 100,000 Mini models a year at the Cowley factory, but the target was quickly reached,
then raised, time and time again. "The risk is that after they've invested massively in the brand, demand tapers
off like it did with the new VW Beetle," said Brad Wernle, from Automotive News Europe. "Of course the day will
come," Mr Reithofer of BMW said. "But we will have ideas.”
Holding value
The price of the car has also gone up. When it was launched, the cheapest Mini cost just more than £10,000. These
days, buyers will have to fork out almost £11,000 to own a new Mini One, or even more for the Cooper S which
costs up to £17,730. The Mini Convertible, which was launched last spring, costs up to £15,690 for the top model,
and there is even a waiting list.
Second-hand Minis are not cheap either. A Mini One bought when the model was launched should still fetch at least
£8,000 for the cheapest model, while a used Cooper S is likely to be priced from £12,556, according to the-car
buying website Parker's. The consumers' association Which operates with slightly different numbers, yet it
confirms that the Mini Cooper 1.6 depreciates more slowly than any other car, other than the Mercedes Benz C180
SE and the BMW 1 Series 116i SE. Adapted from BBC News 16th February 2005.
Factors that influence Demand
Other then price the following factors also have an
impact on demand:
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Income
The Price of other goods
Advertising
Tastes and customs
The Law
Government Polices
Changes in population
Attitudes and information
Price Elasticity
This measures the responsiveness (or sensitivity) of demand to
a change in price

PED =
% change in quantity demanded
% Change in price
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Elastic goods = an answer greater than 1, where demand will
change with a price change
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Inelastic goods = Less than 1, where demand is relatively
unresponsive to a change in price
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Unit elasticity = an elasticity of 1, any price change is
cancelled out by the demand change
Example
- A product increases its price from £100 -
£110 and demand falls from 200 units to 180 units
To calculate % change in price:
 Find 1% of £100 = 100/100 = 1
 Find the change in price: £100 - £110 = -£10
 The the divide the price change by the value of 1% to find out how
many % the price has changed by: 10 / 1 = 10%
Then do the same for demand:
 1%: 200/100 = 2
 Change in demand: 200 - 180 = 20
 % change: 20 / 2 = 10%
Therefore using the equation PED = 10% / 10% = 1 (Unit elasticity)
An illustration of Price Elasticity
Selling price of
the product
Number of customers Demand
A PRICE ELASTIC
GOOD
An illustration of Price Elasticity
Selling price of
the product
Number of customers Demand
A PRICE ELASTIC
GOOD
An illustration of Price Elasticity
Selling price of
the product
Number of customers Demand
A PRICE
INELASTIC GOOD
Interpreting
Price Elasticity of Demand
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Since there is an inverse relationship between price and quality the result
of any PEd calculation will be negative. As such the negative sign is ignored.
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Therefore there are 3 possible outcomes:
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Ped > 1 = Elastic Demand – Quantity changes more than price
Ped = 1 = unitary elastic demand
Ped = < 1 = inelastic demand – Quantity changes less than price
The effect of changes in price can
have an impact on total revenue too.
Therefore it is not always profitable
to increase price.
Elastic or Inelastic…
If demand is not sensitive to price (price inelastic) the business is
likely to increase its price to increase revenue because the
increase in price leads to a smaller decrease in quantity
demanded.
Goods are likely to be inelastic if:
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Only a small amount of income is spent on them i.e. milk
There are few substitutes i.e. they are innovative products or they
are protected by patents
They are addictive goods i.e. cigarettes
They are heavily branded with a strong loyalty
They are paid for by someone else i.e. business travel
If demand is sensitive to price (price elastic) the business will
lower the price to increase revenue, because a lower price will
lead to larger quantities demanded.
Price Elasticity Activity
Based on your knowledge of Price Elasticity of Demand
complete the questions below:
Question 1:
If price decreases from 25p to 20p and the demand changes in
response from 200 to 220 units, what is the price elasticity?
Question 2:
If the price increases from £11 to £13 and the demand then
changes in response from 76 to 52 units what is the price
elasticity?
Price Elasticity Activity
Answers
Question 1.
 A change of -5p = 25p/100 =0.25, -5p/0.25 = -20% change
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A change of 20 units = 200/100 = 2, 20/2 = 10% change
PED = 10/20 = (-) 0.5 (Inelastic)
Question 2.
 A change of £2 = £11/100 = 0.11, 2/0.11 = 18.2%
 A change of -24 units = 76/100 = 0.76, -24/0.76 = -31.6%
PED = 31.6 / 18.2 = (-) 1.7 (Elastic)
Price Elasticity Activity
Based on your knowledge of
Price Elasticity of Demand
complete the worksheet on
the cinema in
Southampton.
Total Marks = 38
Time = 30 minutes