Demand and Price Elasticity
Demand and Price Elasticity ~ How Customers React to Price Changes
Every price tells a story ~ not just about the company’s offer, but about how people react when it changes. Understanding the demand curve is how marketers read that story.
“You can’t manage what you don’t measure ~ and demand is no exception.”
~ On the art of pricing
The invisible tug-of-war between price and demand
For almost every product, there’s a simple rule at play:
when price goes down, demand goes up.
Imagine a movie theater charging $10 per ticket.
Now, it drops the price to $8 for weekday nights.
Suddenly, the seats fill up ~ not because the movies got better, but because the price felt “right.”
That’s demand in action.
Lower price → higher quantity sold.
But what if the ticket dropped only from $10 to $9?
You’d still get more people, but not as many.
The effect weakens ~ and that’s where elasticity enters the picture.
What is elasticity?
Elasticity measures how sensitive demand is to a change in price.
It answers the question:
“If I tweak the price, how much will sales react?”
Depending on the product and market, there are three main scenarios:
- Elastic Demand
- Inelastic Demand
- Unit Elastic Demand
Let’s break them down.
🎯 1. Elastic Demand ~ small price cuts, big reactions
A product has elastic demand when a small price decrease causes a large increase in sales.
Example:
A 1% price drop leads to a 2% jump in quantity sold.
This usually happens in markets full of alternatives ~ like soft drinks, clothes, or mobile accessories.
If your brand gets slightly cheaper, people switch instantly.
“Elastic” means customers are flexible ~ they’ll bend their loyalty for a better deal.
🧱 2. Inelastic Demand ~ price doesn’t matter much
Here, even a big price change barely moves sales.
Think about bread, milk, or sugar ~ necessities we buy regardless of price.
If the price of milk goes up by 10%, most people still buy it.
They might grumble, but they’ll still pour it into their coffee.
Inelastic demand happens when there are few substitutes and the product is essential.
“Inelastic” means customers are stuck ~ they’ll absorb price changes because they have no choice.
⚖️ 3. Unit Elastic Demand ~ equal give and take
This is the balanced middle ground.
If you increase price by 1%, sales drop by exactly 1%.
The change in total revenue? Zero.
Unit elasticity is the dream state of stable markets ~ predictable, manageable, and often found in mature industries where both companies and customers know the rules.
Why elasticity matters for marketers
Understanding elasticity helps companies:
- Predict how revenue will change with different prices.
- Avoid self-inflicted losses from random discounts.
- Segment customers by price sensitivity.
- Design smarter promotions.
For example, luxury brands rely on inelastic demand ~ they can raise prices and still sell.
Discount stores rely on elastic demand ~ lowering prices drives volume and foot traffic.
Both work, but only if you know which kind of demand you’re dealing with.
Every price move should begin with a question: “How will people react?” The answer lies in elasticity ~ not in wishful thinking.
Summary
| Type of Demand | What Happens | Typical Products | Strategic Implication |
|---|---|---|---|
| Elastic | Small price drop → large increase in sales | Snacks, clothes, gadgets | Compete through price adjustments |
| Inelastic | Big price change → small change in sales | Milk, bread, medicine | Focus on reliability and availability |
| Unit Elastic | Price and quantity move proportionally | Utilities, mature goods | Maintain balance and consistency |
The best marketers don’t just set prices ~ they understand how customers stretch around them.
What’s next
In the next lesson, we’ll move to ** Demand, Costs, and Profits** ~
how costs, pricing, and demand interact to determine profitability.