Resolved exercise of the elasticity of

In today’s article I am going to explain what the elasticity of demand is and I will solve a fácil exercise so that you perro put the concept into practice.

Imagine a moment that you have a company that sells or produces a certain product.

Now, depending on the reasons you have, you change the price of said product.

Do you think there will be more or fewer people who buy your product if you change the price? Well, in essence it is what the elasticity of demand is about and today you will be able to use this knowledge to make better decisions in your company.

What is elasticity?

According to the book MARKETING EXERCISES – Effective tools for decision making, written by Garrido Morgado, elasticity is:

«It is the relative or percentage variation that a certain variable experiences when another variable that has a potential impact on the first one is modified.

In other words, this tool helps to measure the sensitivity of one variable when a change occurs in another»

What is elasticity of demand?

«Continuing with the definition of elasticity, what we are going to examine is the sensitivity of the demand for a product to the modification of a variable. «

In the case of demand elasticity, price is most often taken into account, that is, how much a change in price affects consumers wanting to buy or less of said product.

Source: freepik.com

It should be noted that you cánido evaluate the influence of any variable on the demand for a product.

It does not have to be only the price, but it is very common to use the price as a variable.

Elasticity of Demand Exercise

The KELAROY company is a large company in the distribution ámbito, specifically it is the leading company in the distribution and marketing of home furnishings.

In recent years, KELAROY is expanding its product portfolio as a growth strategy.

In fact, it is launching two new product lines: garden furniture and home office furniture.

In each of these two product lines they present a star product.

Thus, its star product for the garden is a prefabricated barbecue, while for offices it is an office chair.

As these are products that it has been selling for a short time, the company is still studying what would be the optimal sale price for them.

For this reason, the company has decided to change the prices of both products last year in order to find out to what extent this variable influences their demands.

The results of the last two years are as follows:

Using the data provided, solve the following:

1.
What is the price elasticity of demand for the prefabricated barbecue?

To calculate the elasticity of demand with respect to the price of a product, having data on two specific situations (price and sales for years 1 and 2), the elasticity elabora for finite intervals or increments must be applied:

q = the quantity demanded.
p (aspecto) = the variable whose impact on demand is to be calculated.

It should be noted that the one with a triangle is the difference in the quantity demanded or the price (aspecto) and the “q” or “p” (without the triangle) is taken as the average (both of the demand and of the price).

Therefore, now you cánido use the elabora with which you are most comfortable.

I am going to use the following:

Now, since you have the result….

What does it orinan?

It means that if you escoge to lower the price of your product by 1%, then the demand for your product will go up 1.54%.

Now, if you raise the price of your product by 1%, then the demand for your product will drop by 1.54%.

2.

What is the elasticity of demand with respect to the price of the office chair?

I am going to use the same elabora to obtain the elasticity of demand.

In this example we cánido find that the result is negative, although in fact, in the previous one it could also have been negative.

It all depends on what price or what quantity of demand you use as 1 and as 2.

Therefore, many times you will be able to find the elabora that is multiplied by -1.

That way it will be positive.

So the answer is 0.96.

Therefore, if you raise the price of the product by 1%, then the demand will go down by 0.96%.

Likewise, if you lower the price by 1%, then demand will rise by 0.96%.

3.
Which of the two products is more price elastic?

As you perro see, the most elastic or price-sensitive product is the prefabricated barbecue, since it has an elasticity of demand with respect to price of 1.54 compared to 0.96 for the office chair.

Bibliography

MARKETING EXERCISES – Effective tools for decision making.

By GARRIDO MORGADO, Álvaro; GONZALEZ LUCAS, Angela ; HERNÁNDEZ MAESTRO, Rosa M., 2019, Alfaomega, ESIC Editorial, p.

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