Marketing analysis

Business A2 · Marketing. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Elasticity measures how strongly demand responds to a change in price, consumer income or promotional spending. It tells a manager whether a price change will raise or lower revenue, how sales will move in a boom or recession, and whether extra advertising will pay. Estimates come from past data, so they go out of date when competitors or tastes change.

Product development runs from generating ideas, through screening, developing a prototype and test marketing, to launch. Ideas come from inside the firm (research and development, employees) and outside (customers, competitors, market research).

Sales forecasting lets a firm plan production, staffing, stock and finance. Time series analysis finds the trend with moving averages and adds the seasonal variation; qualitative methods use expert opinion when there is no past data.

Rules to remember

Price elasticity of demand (PED) = % change in quantity demanded ÷ % change in price. It is negative. Ignoring the sign: above 1 is elastic, below 1 is inelastic.
Elastic demand: a price cut raises total revenue. Inelastic demand: a price rise raises total revenue.
Income elasticity of demand = % change in quantity demanded ÷ % change in income. Positive = normal good (above 1 = luxury); negative = inferior good.
Promotional elasticity of demand = % change in quantity demanded ÷ % change in promotional spending. Below 1 means demand responds less than in proportion.
Percentage change = (new value − old value) ÷ old value × 100.
Four-period centred moving average = (first four-period average + next four-period average) ÷ 2. It lines the trend up with an actual quarter.
Seasonal variation = actual sales − trend. Forecast = extrapolated trend + average seasonal variation for that quarter.

Common mistake

Students turn the elasticity formula upside down or use the changes in units instead of percentages. The percentage change in quantity always goes on top, and each percentage is worked out on the original value.

Worked example

A firm raises the price of a product from $40 to $44. Quantity demanded falls from 1,000 to 850 units a month. Calculate the price elasticity of demand and state the effect on revenue.

% change in price = (44 − 40) ÷ 40 × 100 = +10%.
% change in quantity = (850 − 1,000) ÷ 1,000 × 100 = −15%.
PED = −15 ÷ 10 = −1.5, so demand is price elastic.
Revenue before = $40 × 1,000 = $40,000; after = $44 × 850 = $37,400.

Answer: PED = −1.5 (elastic); revenue falls by $2,600 a month, so the price rise reduces revenue.

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