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Unit 4

Unit 4. Cross-elasticity of demand Extending the 4Ps to 7Ps Table of business matrix tools Forecasting. Price elasticity of demand.

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Unit 4

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  1. Unit 4 Cross-elasticity of demand Extending the 4Ps to 7Ps Table of business matrix tools Forecasting

  2. Price elasticity of demand When you raise the price of most items, people will buy less of them. For example, when one airline raises its price, air passengers may switch to a rival airline. When you reduce the price of most items, people will buy more of them. For example, when supermarkets make special offers with reduced prices, they expect a sharp increase in corresponding sales. Common sense tells us that when prices change, so too will the quantities bought. However, businesses need to have more precise information than this - they need to have a clear measure of how the quantity demanded will change as a result of a price change. The relationship between price and quantity demanded is measured by 'price elasticity of demand' (PED). This is calculated as: change in sales/% change in priceRead more: http://businesscasestudies.co.uk/business-theory/marketing/elasticity-of-demand.html#ixzz1jK71hLYu

  3. Income elasticity of demand (YED) • Income elasticity of demand measures the relationship between a change in quantity demanded and a change in consumer’s income. The basic formula for calculating the coefficient of income elasticity is: • Percentage change in quantity demanded of good X divided by the percentage change in real consumers' income

  4. Normal goods have a positive income elasticity of demand so as income rise more is demand at each price level. We make a distinction between normal necessities and normal luxuries. • Necessitieshave an income elasticity of demand of between 0 and +1. Demand rises with income, but less than proportionately. Often this is because we have a limited need to consume additional quantities of necessary goods as our real living standards rise. The class examples of this would be the demand for fresh vegetables, toothpaste and newspapers. Demand is not very sensitive at all to fluctuations in income in this sense total market demand is relatively stable following changes in the wider economic (business) cycle.

  5. Luxuries on the other hand are said to have an income elasticity of demand > +1. (Demand rises more than proportionate to a change in income). Luxuries are items we can (and often do) manage to do without during periods of below average income and falling consumer confidence. When incomes are rising strongly and consumers have the confidence to go ahead with “big-ticket” items of spending, so the demand for luxury goods will grow. Conversely in a recession or economic slowdown, these items of discretionary spending might be the first victims of decisions by consumers to rein in their spending and rebuild savings and household financial balance sheets. • Many luxury goods also can be called “positional goods”. These are products where the consumer derives satisfaction (and utility) not just from consuming the good or service itself, but also from being seen to be a consumer by others. • Inferior GoodsInferior goods have a negative income elasticity of demand. Demand falls as income rises. In a recession the demand for inferior products might actually grow (depending on the severity of any change in income and also the absolute co-efficient of income elasticity of demand). For example if we find that the income elasticity of demand for cigarettes is -0.3, then a 5% fall in the average real incomes of consumers might lead to a 1.5% fall in the total demand for cigarettes (ceteris paribus).

  6. Cross-elasticity of demand (XED) Very often, a change in the price of one product leads to a change in the demand for another. Cross price elasticitymeasures the responsiveness of demand for good X following a change in the price of good Y (a related good). We are mainly concerned here with the effect that changes in relative prices within a market have on the pattern of demand. With cross price elasticity we make an important distinction between substitute products and complementary goods and services. What products do you think would be relative examples here?

  7. Unit 4 Revision Table

  8. Forecasting • You need to investigate two types: • Extrapolation • Moving Averages • We will cover as a class next week as the last task of Unit 4 and Marketing.

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