What is "Price Elasticity of Demand" and how do you calculate it? What are the three different types that price elasticity is broken down into? What questions would you suggest to the CFO to ask to the marketing department and what is your recommendation to the CFO?
Price Elasticity of Demand:
CPI's marketing team recently discovered that the price elasticity in Brazil for CPI's products is larger than our current markets. This means that CPI could be exposed to currency fluctuations between 5 - 20 % of our revenue. After reviewing this information I feel that it is important for us to understand the differences between inelastic, elastic and unitary price elasticity.
We use the term elasticity when referring to the effect on the actual quantity demanded from a change in price. When you hear us use the term price elasticity of demand we are referring to the measurement of the percentage change in quantity demanded which was caused by a percentage change in price (Stengel, 2011). This type of elasticity is usually always negative and you will almost always see us expressing this in terms of absolute value.
Elasticity is broken down into three different types:
1. Elastic - The demand is elastic if the elasticity is greater than one. Also, the percentage change in quantity will be greater than the ...