Price and income elasticity of demand and their calculation and use; the distinction between elastic and inelastic demand; the implications for pricing and revenue; marketing strategy; and digital and e-commerce marketing.

What this theme is asking

Eduqas wants you to calculate and interpret price and income elasticity of demand, distinguish elastic from inelastic demand, work out the effect of a price change on revenue, and connect this to marketing strategy and the growing role of digital and e-commerce marketing. Elasticity is the key quantitative tool linking price to revenue, and it is heavily examined in Component 2.

Price elasticity of demand

• Elastic demand: $|\text{PED}| > 1$. Quantity changes more than price; demand is sensitive (luxuries, products with many substitutes).
• Inelastic demand: $|\text{PED}| < 1$. Quantity changes less than price; demand is insensitive (necessities, strong brands, few substitutes).
• Unitary: $|\text{PED}| = 1$.

Elasticity and revenue

Income elasticity of demand

YED matters for strategy: in a boom, luxuries and income-elastic products sell well; in a recession, demand shifts towards income-inelastic necessities and inferior goods, so a firm adjusts its range and marketing to the stage of the economic cycle.

Marketing strategy

A marketing strategy is the medium-to-long-term plan for achieving marketing objectives: choosing target markets, positioning, and the broad direction of the mix. Strategy decisions include whether to pursue market penetration (sell more of existing products to existing markets), market development (existing products to new markets), product development (new products to existing markets) or diversification (new products to new markets), the four options of Ansoff's matrix. Elasticity informs strategy by revealing where the firm has pricing power and how demand will move with the economy.

Digital and e-commerce marketing

Digital marketing has reshaped the mix. Social media, search-engine and content marketing let firms target precise segments cheaply and measure response directly. E-commerce widens the market and enables dynamic pricing that adjusts to demand in real time. Data analytics lets firms personalise offers and test the mix continuously. For small firms especially, digital channels lower the cost of reaching customers and competing with larger rivals, though they raise issues of data privacy, online competition and the cost of returns.

Examples in context

A strong brand of trainers has inelastic demand, so it raises prices and grows revenue. A supermarket's basic range is price-elastic, so a discount lifts revenue. In a downturn, demand shifts to inferior goods (own-brand staples), an income-elasticity effect. A challenger brand uses social-media and search marketing to target a niche cheaply, and an airline uses dynamic pricing online.

Try this

Q1. A price rise of $5\%$ causes quantity demanded to fall by $2\%$. Calculate the PED and state whether demand is elastic or inelastic. [3 marks]

• Cue. $\tfrac{-2}{5} = -0.4$; $|{-0.4}| < 1$, so demand is inelastic.

Q2. Explain why a firm would want its product to have inelastic demand. [3 marks]

• Cue. With inelastic demand the firm can raise price without losing many sales, so revenue (and likely profit) rises, giving it pricing power; firms build this through branding and differentiation.