Cross elasticity of demand (XED) Advertising elasticity of demand (AED)

CROSS ELASTICITY OF DEMAND (XED)ADVERTISING ELASTICITY OF DEMAND (AED)

LEARNING OBJECTIVES

To be able to interpret and calculate cross elasticity and advertising elasticity of demand

CROSS ELASTICITY OF DEMAND (XED)

Measures the responsiveness of demand for a product following the change in the price of another product

Cross Elasticity =

% change in demand for product X

% change in demand for product Y

CROSS ELASTICITY OF DEMAND (XED)

• If 2 goods are close substitutes, such as Xbox and PlayStation, then a fall in the price of Xbox is likely to lead to a reduction in the price of PlayStations. Cross elasticity is positive

• If 2 goods are often bought together. IPhone and IPhone Apps, then an increase in the price of the phone is likely to lead to a reduction in the demand for applications. Cross elasticity is negative

A 10% price rise for Bounty´s causes a 20% increase in quantity demanded of Mars Bars. FACT.

+20

+10

XED = +2

A 20% price rise for battered fish causes a 50% decrease in quantity demanded of chips. This is also a FACT.

-50

+20

XED = -2.5

XED, SUBS AND COMPS

XED = +1 or greater This means that the goods are substitutes (by raising the price of one, people turn to the other). The higher the number, the STRONGER the substitute.

XED = -1 or ‘greater’This means that the goods are complements (by raising the price of one, people also stop buying the other). The ‘higher’ the number, the STRONGER the complement.

If XED is less than 1, then there is little or no connection. If it is 0, then the good is totally INDEPENDENT

• Can you think of some substitutes or complimentary goods?

ADVERTISING ELASTICITY OF DEMAND (AED)

• Measures the responsiveness of demand for a product following a change in the advertising spending on it

Advertising Elasticity =

% change in demand for product

% change in advertising spend on product

ADVERTISING ELASTICITY OF DEMAND (AED)

Generally, where a company spends on advertising, demand tends to be high

This is not always the case, if:Rival firms spend more on advertising

Campaign is expensive and ineffective

Other elements of the marketing mix are not working well

ELASTICITY & THE PRODUCT LIFE CYCLE

Elasticity & The Product Life CycleStage of the product

life cycleApplication of elasticity

Launch / Introduction and growth

• PED - Price will not affect demand, people are willing to pay high prices, maybe we could even charge higher prices

• YED – • XED – • AED –

Saturation \ Maturity

Decline