The marketing strategy - Price Flashcards
(16 cards)
Define price elasticity of demand
when the price of a product or service changes, then the level of demand will also change
What does the level of change depends on? (PED)
- inelastic or elastic good
- level of price change
- subject to habitual demand
- purchase post-poned
forumla for PED?
(% change in demand)÷(% change in price)
interpret PED?
1+ = elastic in relation to price change
1 = demand is unit inelastic
0-1 = inelastic in relation to price change
0 = demand is perfectly inelastic
what is income elasticity of demand?
measures the extent to which the quantity of product demanded is affected by a change in income
what is the formula of IED?
(% change in demand)÷(% change in income)
interpret IED?
luxury - income elasticity more than 1
necessity - income elasticity less than 1, more than 0
normal good and IED:
rise in income = rise in demand and vice versa
inferior good and IED:
less than 0 = negative
demand falls because:
- switch to better alternatives
- substitutes become affordable
what is Cross elasticity of demand? (XED)
measures the responsiveness of demand for good X following a change in the price of related good Y
what is the formula for XED?
(% change in demand for good X)÷(% change in price for good Y)
how do substitutes work with XED?
- increased price of X leads to increase - - demand of Y and vice versa
positive XED
how do complements work with XED?
decrease price of X leads to increase demand of Y and vice versa
how does PED work alongside total revenue?
- PED<1 = rise of price increases revenue (inelastic)
- PED = 1 = total rev unchanged
- PED>1 = fall in price increases total revenue (elastic)
what are the limitations of PED?
- assumes you know what will happen to demand as a result of a change in variable
- info will not always be accurate
- difficult to predict new products as previous data is limited
what are the strengths of PED?
- helps marketers to decide whether/how much to increase/decrease prices by
