Through my preparation for business school, I took many Economic classes. One of the main points of Econ was elasticity of demand. When I began to read about this in the marketing book, it surprised me to use such a boring subject in Econ in such an exciting way in Marketing. The price elasticity of demand is the measure tof the sensitivity of customers to changes in price. And example would be if the price changes by a certain percent, then the demand would change as a result. There is a specific formula to use: Price elasticity of demand = (percentage change in quantity demanded) / (percent change in price)
There are two different kinds of elasticity: inelastic and elastic. Inelastic demand is that the change in price has little or no effect on the quantity consumers are willing to buy. Elastic demand is that they change in price has a large effect on the change of demand.
When demand is elastic, change in price and revenues work in opposite direction. If the price increases, then the revenues decrease. If the price is decrease, then revenues increase. A good example would be gas. When price of gas increased, demand for gas reduced by a huge amount. When price decreased, then demand returned and possibly went up from the former demand before the price increase.
When demand is inelastic, such as in pizza, the demand remains the same or increase/decreases by small amounts depending on price change. I know that if I see a deal on pizza, it doesn't immediately cause me to want to buy the pizza, but an increase in price doesn't make much of a difference because I also may not know what prior prices were like.
There is also cross-elasticity of demand. This is when changes in the price of one product affect the demand for another item. When products are substitutes, (ex. hot dogs and hamburgers), and price of one increases, then the demand for the other increases. When two products are complements, (ex. hamburgers and condiments), and price of one increases, then the demand for that item decreases and also the demand for the complement item decreases.
