Page 367 - Foundations of Marketing

334 Part 4 | Product and Price Decisions

Demand Fluctuations

Consumer demand is influenced by many more factors than just price. Changes in buyers’
needs, variations in the effectiveness of other marketing mix variables, the presence of
substitutes, and dynamic environmental factors can all influence demand. Restaurants and
utility companies experience large fluctuations in demand at different periods throughout
the day. Toy manufacturers, fireworks suppliers, and air-conditioning and heating contrac-
tors face demand fluctuations because of the seasonal nature of their products. For example,
flowers are in higher demand in the United States around Valentine’s Day and Mother’s Day.
In some cases, demand fluctuations are predictable. It is no surprise to restaurants and utility
company managers that demand fluctuates. However, changes in demand for other prod-
ucts may be less predictable, leading to problems for some companies. Other organizations
anticipate demand fluctuations and develop new products and prices to meet consumers’
changing needs.

Assessing Price Elasticity of Demand

Up to this point, we have seen how marketers analyze the target market’s conception of
price for different products and how that affects the quantity of product sold under normal
and prestige demand curves. The next step is to assess price elasticity of demand. Price
elasticity of demand provides a measure of the sensitivity of consumer demand for a
product or product category to changes in price. Elasticity is formally defined as the per-
centage change in quantity demanded relative to a given percentage change in price (see
5
Figure 12.3 ). For a product with inelastic demand, an increase in price (from P 1 to P 2)
does not affect quantity demanded (from Q 1 to Q 2) very much. Utilities and gasoline are
examples of products that are fairly inelastic because we still require them to go about our
normal routines, even if the price increases. For a product with highly elastic demand, you
can see that a relatively small increase in price, such as from P 1 to P 2, results in a huge
change in quantity sold, from Q 1 to Q 2. Non-essential items or those with ready substitutes
price elasticity of demand tend to have more elastic demand.
A measure of the sensitivity of If marketers can determine the price elasticity of demand for a product, setting a price
demand to changes in price is easier. By analyzing total revenues as prices change, marketers can determine whether a

Price Elasticity of Demand
Electricity is an example of
a product that has inelastic
demand. When the price of
electricity goes up, consum-
ers do not significantly reduce © Richard A. Abplanalp/ Shutterstock.com
consumption, and when the
price goes down, they do not
significantly increase their
consumption.

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