The student should take examples of five products or services for each type of elasticity of

demand, measure the elasticity of

demand for these products, and elucidate the implications for managers to take pricing
decisions.

Select the products/services.

2. Apply different types of Elasticity of Demand.
3. Make use of the data on different elasticities of demand.
4. Identify appropriate pricing decisions.

Price elasticity of demand measures the responsiveness of demand to a

change in price.
 Price inelastic – a change in price causes a smaller % change
in demand.
 Price elastic – a change in price causes a bigger % change in
demand.

We say a good is price inelastic, when an increase in price causes a smaller

% fall in demand, e.g. if price of petrol rises 40%, but demand for petrol
only falls 10%  the PED = – 0.25
Examples of price inelastic demand

 Petrol – petrol has few alternatives because people with a car

need to buy petrol. For many driving is a necessity. There are
weak substitutes, such as train, walking and the bus. But,
generally, if the price of petrol goes up, demand proves very
inelastic.
 Salt. If the price of salt increased, demand would largely be
unchanged. It is only a small % of income and people tend to
buy infrequently. It is a good with no real substitutes at all.
Examples of price elastic demand

We say a good is price elastic when an increase in prices causes a bigger %

fall in demand.  e.g. if price rises 20% and demand falls 50%, the PED = -
2.5

 Kit Kat chocolate bar. If Kit Kats increase, people will switch
to alternative types of a chocolate bar.
 Porsche sports car. If a Porsche increases in price, demand
will probably be elastic because it is a high % of income, and
so the higher price will put people off. Also, there are other
alternatives, such as Jaguar or Aston Martin. However, this is a
little less clear cut. Some car enthusiasts may want to buy a
Porsche whatever the price.
 Coca cola

Income elasticity of demand

Income elasticity of demand measures how demand responds to a change

in income.

 If income goes up 10%, and you spend 20% more on foreign

holidays. The YED = 2.0 (luxury goods)
 If income goes up 10%, and you spend 5% less on Tesco value
baked beans. The YED = -0.5 (inferior good)
Examples of income elastic (luxury goods)

Income elastic – means a change in income causes a bigger % change in

demand, e.g.

 Porsche sports car. As income increases, people can spend a

higher % of their income on the car
 Organic bread. If income increases people may switch to the
‘luxury’ option of organic bread.
 Homemade soup. If income increases, people will buy the
more expensive fresh soup, rather than cheaper tins, which
aren’t as nice.
 ‘Premium unleaded’ more expensive petrol, which is
supposed to be better for your engine. Most people stick with
the cheapest.
An inferior good has a negative income elasticity of demand. When
incomes increase, demand falls.

 Tesco value baked beans. If your income increases, you stop

buying Tesco value beans and switch to Heinz, which are
better quality.
 Instant coffee. Instant coffee is cheap, if income goes up, you
may buy takeaway or switch to filter coffee.
 Milk powder. A cheap way to drink milk.