Marketing Notes – Elasticity Analysis

What is Elasticity?

• A Sensitivity Measure
• Measures impact on a criterion variable from changes in a managerial control variable
• A percentage computation
  Elasticity = – (ΔQ ÷ Q) ÷ (ΔP ÷ P)

Point Elasticity – Interpretation

• All computations can be interpreted as follows:
  An x% change in the criterion variable is associated with a 1% change in the control variable
• Classification of elasticity:
  • Unitary (E_D = 1)
  • Elastic (E_D = infinity perfectly elastic)
  • Inelastic (E_D = 0 perfectly inelastic)

  Arc Elasticity = (change in Q ÷ average Q) ÷ (change in P ÷ average P)
                = [(Q1 – Q2) ÷ (0.5*(Q1 + Q2))] ÷ [(P1 – P2) ÷ (0.5*(P1 + P2))]

Other Types of Elasticity

• Income
• Advertising
• Cross elasticities
• In principle, an elasticity can be computed for any variable
• Managerially, we use business variables under our control

Conclusions

• Elasticity analysis is a sensitivity approach
• Price elasticities have relatively clear profit implications
• Other elasticities require a contribution analysis to interpret the impact on profit (i.e., change in revenue minus the increased cost of management change)