Marketing Notes – Elasticity Analysis

ABOUT THIS CONTENT

Basic notes from core MBA marketing course, focusing on elasticity analysis
Subject: Marketing

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 (ED = 1)
    • Elastic (ED = infinity perfectly elastic)
    • Inelastic (ED = 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)
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