A quick,fun, and easy-to-remember explanation of a key marketing and economic concept: the price elasticity of demand.

1. IN A NUTSHELL
the price elasticity of demand

2. Hi! I’m Frederik, a marketer and
copywriter.Textbooks and industry
articles sometimes get a bit lost in
jargon when explaining key ideas.
That’s why I created nutshells: to
explain technical concepts in a way
that’s simple, straightforward, fun,
and easy to remember.

3. Today’s topic:

4. WHEN MARKETERS
talk about the Price Elasticity of Demand, they’re referring
to how much people buy in relation to how much things
cost.

5. IN OTHER WORDS,
it’s about buying behavior (aka demand) versus price.

6. WHEN PEOPLE CHANGE
how they buy based on whether a price goes up or down,
we say that the demand is elastic.

7. WHEN THE PRICE
goes up and people buy less, that’s elastic demand.

8. WHEN THE PRICE
goes down and people buy more, that’s also elastic
demand.

9. BUT WHAT HAPPENS
when people don’t change how much they buy when prices
go up or down?We call the demand inelastic.

10. ANOTHER WAY
of describing market demand is in terms of whether
consumers are price sensitive (elastic demand) or
insensitive (inelastic demand).

11. Why is it important for marketers
to understand price elasticity of
demand?

12. BECAUSE
it helps them appropriately price their products or services
according to strategic marketing and business goals.

13. So how can you tell whether
demand is stretchy or rigid?

14. AS A GENERAL RULE,
the more common and easily-substituted a product is, the
more likely demand will be stretchy like a rubber band.

15. IF A PRODUCT
is a necessity instead of a mere want, consumers will tend to
be less price sensitive.They’ll pay what they have to for a
product they really need. Demand will be less elastic.

16. ANOTHER FACTOR
is income: consumers with higher incomes tend to spend more
and have less price sensitivity, while consumers with lower
incomes tend to spend less and have greater price sensitivity.
As incomes change, price sensitivity changes.

17. BRAND LOYALTY
also plays a role. If consumers are loyal to a particular brand,
they will be more willing to keep buying regardless of increases
in price. Demand tends to be inelastic.

18. TO UNDERSTAND
the nature of demand, it helps to have a demand curve that
tells us how much people buy as prices change.

19. (IN PARENTHESIS.)
What’s a demand curve? It’s a graph that plots price on the
vertical axis against quantities demanded on the horizontal axis.
Demand curves can be generated from customer surveys and
market trials, but are generally theoretical constructs.

20. A BIT OF MATH.
Price elasticity is the slope of the demand curve. It can be
calculated using the following formula:
Price Elasticity = % change in quantity ÷ % change in price

21. A BIT OF MATH.
If the price elasticity is less than -1, demand is elastic.
If price elasticity is greater than -1, demand is inelastic.

22. ONE MORE THING.
Elasticity for a product can vary depending on where a product
is located on the demand curve. In some price / quantity ranges,
a product’s demand might be elastic, while at other ranges
demand might be inelastic.

23. DIG DEEPER …
Grewal, Dhruv, and Michael Levy. Marketing, 5th Edition. NewYork, NY: McGraw-Hill/Irwin, 2015.
Kerin, Roger A., StevenWilliam Hartley andWilliam Rudelius. Marketing, 12th Edition. NewYork, NY:
McGraw-Hill/Irwin, 2015.
Wikipedia: https://en.wikipedia.org/wiki/Price_elasticity_of_demand

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