3 D ECISION
M A K I N G TO
IMPROVE
MARKETING
PERFORMANCE
How much would you pay for a can of Coca Cola?
• Would you pay 50p?
• Would you pay 80p?
• Would you pay £1.00?
• Would you pay £1.20?
What happens to demand as price goes up?
How much would you pay for a can of Tesco Cola? Is this
different to Coca Cola? Why?
3.2.3 U NDERSTANDING MARKETS AND
AQA Business
CUSTOMERS
3.2.3 U NDERSTANDING
MARKETS
AND CUSTOMERS

In this topic you will learn about

The interpretation of price and income elasticity
of demand data

The value of the concepts of price and income
elasticity of demand to marketing decision
makers

The use of data in marketing decision making and
planning
P RICE
ELASTICITY OF DEMAND
(PED)

Price elasticity of demand is a measure of how responsiveness
demand is to a change in price

There is an inverse relationship between price and demand


As price goes up demand goes down

As price goes down demand goes up
But the question is by how much? Is the change in demand more
than proportional to the change in demand or less than
proportional?
Price
increases
by 10%
Demand
falls by
5%
PED is price
inelastic as the
fall in demand is
less than the fall
in price.
P RICE
ELASTICITY OF DEMAND
(PED)
Price
increases
by 10%
How price
inelastic can a
cheese
sandwich
really be?
Demand
falls by
13%
PED is price
elastic as the fall
in demand is
greater than the
fall in price.

Price elastic demand means that a change in price will
lead to a more than proportional change in demand
i.e. demand is sensitive to price changes

Price inelastic demand means that a change in price
will lead to a less than proportional change in
demand i.e. demand is not so sensitive to changes in
price
Can you think of products that are likely to be highly price elastic
and some that are likely to be highly price inelastic?
P RICE
ELASTICITY OF DEMAND
(PED)
You will not be
asked to calculate
the PED in the
examination but
an understanding
of the formula
helps to
understand the
concept and could
be used to help
gain application
marks in the
examination.
PED can be calculated using the formula:

% change in quantity demanded
% change in price
= PED
Example
A newsagent sells 200 cans of Coca-Cola a week at a price of £0.50. The
newsagent raises the price of the Coca-Cola to £0.60 and demand falls to 180
cans. What is the PED for this product?
Step 1 Change in Demand x 100
Original Demand
-20
x 100
200
= - 10%
Step 2 Change in Price x 100
Original Price
10
50
x 100
= 20%
Step 3 % change in Qd
% change in P
-10
20
= - 0.5
The answer is -0.5 as a 20% change in price has led to a less than proportional
change in demand of just 10%. The cans are therefore said to be price inelastic.
P RICE

ELASTICITY OF DEMAND
(PED)
In business it is assumed that the PED will always
be negative i.e. price and demand will always
move in the opposite direction

If PED is between 0 and -1 e.g. -0.7 then demand
is price inelastic

If PED is less than -1 e.g. -1.4 then demand is
price elastic
Why can premier league football clubs charge
such high prices for tickets?
W HAT IS THE IMPACT ON
CHANGE IN PRICE ON
REVENUE ?

Business people want to know how a change in price
will impact on revenue

This will help determine whether changing price is a
good or bad marketing decision
Price elastic
demand
Price inelastic
demand
Raise selling price
Sales revenue will
decrease
Sales revenue will
increase
Lower selling price
Sales revenue will
increase
Sales revenue will
decrease
R EARRANGING THE FORMULA
To calculate the percentage change in demand just multiply the percentage change
in price by the price elasticity of demand.
You could be given both of these figures in an examination.
T HE
SIGNIFICANCE OF
PED
Price inelastic – if a product is price inelastic then a firm knows that if it raises
price, even though demand will fall, total revenue will increase.
This can be shown mathematically.
Price = £1.00 Demand = 100 units
What is total revenue? Price x demand
£1.00 x 100 units = £100
PED = - 0.5
Should the firm raise price?
If the firm were to raise price by 10 pence, from £1.00 to £1.10, this is a 10% price
rise (10%).
Using the PED formula:
% change in Qd = - 0.5
10%
T HE
SIGNIFICANCE OF
PED
Rearrange the formula:
-0.5 x 10% = 5%
There is a 5% change in demand
PED is –ve therefore in this case when price goes up by 10% demand goes
down by 5%
Demand will go down from 100 units to 95 units
What is total revenue? Price x demand
£1.10 x 95 units = £104.50
By raising the price of a price inelastic product the firm has increased TR.
TR will fall if the firm attempts to lower price.
T HE
SIGNIFICANCE OF
PED
Laptops4u sold 1000 laptops in 2015 at a price of £400 each.
In 2016 they decided to reduce their laptop price to £350.
Their price elasticity of demand was -2.
1)
2)
3)
4)
5)
6)
Are Laptops4u’s laptops price elastic or price inelastic?
What was the total revenue in 2015?
What was the percentage change in price in 2016?
What was the percentage change in demand in 2016?
What was the new revenue on 2016?
Was it a good or bad idea to change price from a financial
viewpoint?
FACTORS
INFLUENCING
PED
A number of factors affect the value of the PED coefficient
including:
 The availability of substitutes – the closer the
substitutes and the more that are available the higher the
price elasticity of demand
 The price of competitor goods – if the price of goods in
competition with a product increase this will affect
demand and price elasticity of demand
 Time – the longer the time period the higher the price
elasticity of demand. Given more time other firms have
the ability to produce similar products and customers
have more chance of adapting their buying habits
FACTORS
INFLUENCING
PED
 Branding – firms spend time and money building up their
brand image. By creating brand loyalty firms know that
their customers will be willing to pay more for the product
and they can therefore raise prices as the PED is lower
What factors will
influence the
PED for Coca
Cola’s Fairlife
milk?
 Income - if consumer incomes are higher then the issue
of price becomes less important to the consumer and it is
easier for firms to raise price as the PED is lower
 Nature of the good
 a luxury good will be price elastic as demand will
be more sensitive to changes in price
 a necessity good will be price inelastic as demand
will be less sensitive to changes in price
P ROBLEMS OF FORECASTING PRICE
ELASTICITY OF DEMAND
 The price elasticity of demand for a product is constantly
changing in a dynamic world
 It is very difficult for firms to measure because:
 Difficulty in finding accurate information
 Price elasticity changes over different price ranges
 Price elasticity will change over the period of the
economic cycle e.g. it will be affected in a recession
 Tastes and fashions are constantly changing
 Competitors don’t stand still
 They are continually improving existing products,
bringing out new products and trying to promote their
products
I NCOME ELASTICITY OF DEMAND


Income elasticity of demand (YED) is a measure of the
responsiveness of demand to a change in income
Income elasticity of demand can be negative or positive i.e.
income and demand can move in the same direction or
opposite directions
 When demand for a product increases when incomes
increase we call this a normal good
 Normal goods will always have a positive income
elasticity of demand i.e. a + sign
 When demand for a product decreases when incomes
increase we call this an inferior good
 Inferior goods will always have a negative income
elasticity of demand i.e. a – sign
I NCOME ELASTICITY OF DEMAND

Calculated by the formula:

% change in quantity demanded
= YED
% change in income
Example: Incomes increase by 15%. This leads to an increase in the demand for iPads of
20%.
The income elasticity of demand is = 20/15 = +1.33
YED
coefficient
Title
Relevance to business
-1<+1
Income inelastic
Demand changes at a lower proportion
than the change in income
< -1 or > +1
Income elastic
Demand changes at a higher
proportion than the change in income
D ETERMINANTS OF INCOME
ELASTICITY OF DEMAND
There are two
types of normal
good:
Necessities are
products that
have a positive
YED that is
between 0 and 1.
Luxuries are
products that
have a positive
YED that is
greater than 1.
Remember,
products that
have a negative
YED i.e. less than
0 are an inferior
good or service.

Income elasticity of demand is determined by:

Whether the good is a necessity or a luxury


At higher standards of living increased consumer incomes see additional
demand tend towards luxury goods as demand for necessities is satiated
The level of income of a consumer

Poorer consumers tend to spend their income on necessities

As they become wealthier the YED for necessities moves towards zero as
consumers are satisfied with the amount of the product e.g. staple foods that
they can buy


Normal goods that are necessities will have lower positive YED
coefficients
As consumer incomes increase they are likely to spend some of their income
on luxuries

These products e.g. cars and foreign holidays will have higher positive
YED coefficients
INCOME ELASTICITY OF DEMAND –
RELEVANCE TO BUSINESS
.

Standards of living

Wealthier countries are likely to have consumers with higher
disposable incomes

This means that they have greater spending power and are
likely to use some of this greater income to buy luxury goods
and services

Therefore, firms will produce superior products that meet the
needs of these consumers e.g. high technology goods and
complex financial services

As global standards of living increase we would expect to see
an increase in demand for luxury goods and a movement away
from inferior goods

Firms will identify the state of the economy e.g. recession and
produce goods and services to meet the demand of consumers.
For example, pound shops selling necessities and inferior goods
are likely to expand in these market conditions
Coefficient of PED and YED
-2
-1
0
+1
+2
PED Inelastic
PED Elastic
YED Inelastic
YED Elastic
YED Elastic
In pairs take it in turn to demonstrate your understanding of PED and YED based on
the diagram above. Where possible support your explanations with relevant
examples. Try to use key terminology including substitutes, necessities, luxury
goods etc.
T HE USE OF DATA IN
MARKETING DECISIONS AND
PLANNING

Marketing data can help predict both PED and YED


Marketing data can be used to forecast sales


This can then be used to help inform pricing decisions
and product decisions
This will then help inform all other functions on
resource requirements allowing for planning e.g. how
many staff are need
Marketing data can help better understand customer
needs

Decisions can therefore be made that will help meet
these needs
3.2.3 U NDERSTANDING
MARKETS
AND CUSTOMERS

In this topic you have learnt about

The interpretation of price and income elasticity
of demand data

The value of the concepts of price and income
elasticity of demand to marketing decision
makers

The use of data in marketing decision making and
planning