America, Lilane

Beltran, Abigail D.

De Isidro, Francis Alex O.

Recto, Aubrey M.

Santiago, Kristine C.

Sengco, Claire Marie C.

Demand analysis serves three major managerial objectives.

First, it provides the insights necessary for marketing teams to effectively manage demand.

Second, it helps forecast unit sales to inform operations decisions, and

Third it projects the revenue portion of a firm’s cash flow stream for financial planning.

Price elasticity of demand is a measure of the sensitivity of quantity demanded to a change in one of the
factors influencing demand, such as price, advertising, promotions, packaging, or income levels.

DEMAND RELATIONSHIPS

DEMAND SCHEDULE DEFINED

 is the simplest form of the demand relationship. It is merely a list of prices and corresponding
quantities of a product or service that would be demanded over a particular time period by
some individual or group of individuals at uniform prices.

CONSTRAINED UTILITY MAXIMIZATION AND CONSUMER BEHAVIOR

 based on the theory of consumer choice. Each consumer faces a constrained optimization
problem, where the objective is to choose among the combinations of goods and services that
maximize satisfaction or utility, subject to a constraint on the amount of funds (i.e., the
household budget) available.

SUBSTITUTION EFFECT

 a result of the price decline, the rational consumer can increase his or her satisfaction or utility
by purchasing more of the good whose price has declined and less of the substitutes

Targeting, Switching Costs, and Positioning

1. Targeting- subject of extensive markting research using surveys, focus groups and statistical
analysis.
2. Establishing loyalty programs to secure repeat purchase customers
3. Positioning a product in customer's mind. Marketers often go to create a product image and
customers association to which the target household aspire.
The Price Elasticity of Demand

Elasticity- measure of the responsiveness of quantity demanded or supplied to changes in any of the
variable that influences demand and supply fall.

(Insert formula)

Where, ΔQ = change in quantity demanded

ΔP = change in price

Arc Price Elasticity- The arc price elasticity of demand is a technique for calculating price elasticity
between two prices. It indicates the effect of a change in price, from P1 to P2, on the quantity
demanded. The following formula is used to compute this elasticity measure:

(Insert formula)

Where, Q1 = quantity sold before a price change

Q2 = quantity sold after a price change

P1 = original price

P2 = price after a price change

Point Price Elasticity

The preceding formulas measure the arc elasticity of demand; that is, elasticity is computed over a
discrete range of the demand curve or schedule.

Interpreting the Price Elasticity: The Relationship between the Price Elasticity and Revenues

Demand is unit elastic

 A percentage change in price P is matched by an equalpercentage change in quantity demanded

QD.
 A given percentage change in price is exactly offset by

the same percentage change in quantity demanded, the net result being a constant total

consumer expenditure.

Demand is elastic
  A percentage changein P is exceeded by the percentage change in QD.
 That is, |ED|>1—a given percentage increase

(decrease) in price is more than offset by a larger percentage decrease (increase) in quantity sold.

Demand is Inelastic

 Percentage changein P results in a smaller percentage change in QD.

 That is, |ED|<1—an increase in price from $2 to

$3, for example, results in an increase in total revenue from $18 to $24.

When demand elasticity is less than 1 in absolute value (i.e., inelastic), an increase

(decrease) in price will result in an increase (decrease) in (P · QD).

When total revenue is maximized, marginal revenue equals

zero. At any price higher than P2, the demand function is elastic.

THE IMPORTANCE OF ELASTICITY REVENUE RELATIONSHIP

 elasticity is often the key to marketing plans

 to understand whether the price of a product is elastic or inelastic
 tool of the marketers used against their competitors

FACTORS AFFECTING THE PRICE ELASTICITY OF DEMAND

 the availability and closeness of substitute

-the most important determinant

-the greater number of substitute goods in the market the more price elastic for a product
demand

 percentage of the consumer's budget

- products that take up a high percentage of income will have a more elastic demand

 positioning as income superior

- how a product is positioned to the target customers

 time period of adjustments

 - demand is more price elastic, the longer that consumers have for respond to price change

Income Elasticity of Demand

refers to the ratio of the percentage change in quantity demanded to the percentage change in income,
assuming that all other factors influencing demand remain unchanged.

Arc Income Elasticity

refers to the technique for calculating income elasticity between two income levels.

Point Income Elasticity

the arc income elasticity measures responsiveness of quantity demanded to changes in income levels
over a range. In contrast, the point income elasticity provides a measure of this responsiveness at a
specific point on the demand function.

Advertising Elasticity

measures the responsiveness of sales to changes in advertising expenditures as measured by the ratio of
the percentage change in sales to the percentage change in advertising expenditures.