DEMAND ELASTICITY
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Overview
•Context: Product manager wants to estimate impact of price
change on sales (quantity and revenue). How sensitive is demand
to price? How important is the pricing of competing products?
•Concepts: demand elasticity, cross-elasticity
•Economic principle: sometimes reducing price attracts many more
customers, sometimes very few
2
How sensitive is demand to price changes?
•Example 1: world oil demand decreases by 1.3 million barrels a
day when price increases from $50 to $60 dollars per barrel.
Would you consider the demand for oil very sensitive or not very
sensitive to price?
•Example 2: demand for sugar in Europe decreases by 1 million
tones per day when average retail price increases from e.80 to
e.90 per kilo. Can you compare the demand for sugar in Europe
to the worldwide demand for oil?
•Problem: by measuring the slope of the demand curve, we are
stuck with units: barrels, dollars, kilos, euros, and so on.
3
Demand elasticity: definition
✏⌘
dq
q
dp
p
=dq
dp
p
q=dlog q
dlog p
3
Demand elasticity: definition
✏⌘
dq
q
dp
p
=dq
dp
p
q=dlog q
dlog p
q
q
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