Case Session 3
Price elasticity of Demand
Given an estimate of the price elasticity of demand, a manager could calculate the expected
percentage change in quantity demanded resulting from a given change in price by multiplying the
percentage change in price by estimated elasticity.
Consequently, the manager must rely on his or her knowledge of the product and the nature of the
market to estimate price sensitivity. Among the factors that tend to make demand for the firm’s
product more sensitive to price are the following:
The product has few unique features that differentiate it from rival products, and buyers are
aware of the prices and features of rival products (airline services).
Buyers ‘expenditures on the product are a large fraction of their total expenditures.
The product is an input that buyers use to produce a final good whose demand is itself
sensitive to price.
Among the factors that tend to make demand less sensitive to price are the following:
Comparisons among substitute products are difficult. This could be because the product is
complex and has many performance dimensions; because consumers have little or no
experience with substitute product (because comparison shopping is costly).
Because of tax deductions or insurance.
A buyer would incur significant costs upon switching to a substitute product.
The product is used in conjunction with another product to which buyers have committed
themselves (printer and ink).
Brand level Vs Industry level elasticity
Students often mistakenly suppose that just because the demand for a product is inelastic, the
demand facing each seller of that product is also inelastic. Demand can be inelastic at the industry
level, while it can be highly elastic at the brand level (example with gasoline and gasoline stations).
If a firm expects that rivals will quickly match its price change, then the industry-level elasticity is
appropriate. If, by contrast, a firm expects that rivals will not match its price change (or will do so
only after a long lag), then the brand-level elasticity is appropriate.
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Price elasticity of Demand
Given an estimate of the price elasticity of demand, a manager could calculate the expected
percentage change in quantity demanded resulting from a given change in price by multiplying the
percentage change in price by estimated elasticity.
Consequently, the manager must rely on his or her knowledge of the product and the nature of the
market to estimate price sensitivity. Among the factors that tend to make demand for the firm’s
product more sensitive to price are the following:
The product has few unique features that differentiate it from rival products, and buyers are
aware of the prices and features of rival products (airline services).
Buyers ‘expenditures on the product are a large fraction of their total expenditures.
The product is an input that buyers use to produce a final good whose demand is itself
sensitive to price.
Among the factors that tend to make demand less sensitive to price are the following:
Comparisons among substitute products are difficult. This could be because the product is
complex and has many performance dimensions; because consumers have little or no
experience with substitute product (because comparison shopping is costly).
Because of tax deductions or insurance.
A buyer would incur significant costs upon switching to a substitute product.
The product is used in conjunction with another product to which buyers have committed
themselves (printer and ink).
Brand level Vs Industry level elasticity
Students often mistakenly suppose that just because the demand for a product is inelastic, the
demand facing each seller of that product is also inelastic. Demand can be inelastic at the industry
level, while it can be highly elastic at the brand level (example with gasoline and gasoline stations).
If a firm expects that rivals will quickly match its price change, then the industry-level elasticity is
appropriate. If, by contrast, a firm expects that rivals will not match its price change (or will do so
only after a long lag), then the brand-level elasticity is appropriate.
1|Page
,2|Page
, 3|Page
