The price elasticity of demand (Marshall)

Price changes are among the short-term growth options considered in Strategic repositioning and shaping profit growth options. Price elasticity tests how much customer demand is likely to move when price changes.

When to use it

• Use elasticity whenever a material initiative raises or lowers price relative to competitors.

Origins

Economist Alfred Marshall formalised price elasticity in 1890. It is calculated as the percentage change in quantity demanded divided by the percentage change in price, enabling responses in different markets and units to be compared on a common basis.

What it is

Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a price change. High absolute elasticity means volume changes substantially; low absolute elasticity means volume changes less.

Marshall’s 1890 definition is:

PED = percentage change in quantity demanded ÷ percentage change in price.

PED is usually negative because higher prices normally reduce quantity demanded. Demand is elastic when the absolute value exceeds one and inelastic when it is below one. At zero, quantity does not respond to price. A positive result may indicate unusual income, status or measurement effects, often discussed through Giffen and Veblen goods, but such cases require careful evidence.

The most important determinant is the availability of substitutes. If pork becomes more expensive while chicken does not, consumers may switch, making pork demand more elastic. A staple with fewer acceptable alternatives may be less responsive.

Price elasticity of demand

Product A: Elastic (large change in quantity demanded for unit change in price)

Product B: Inelastic (small change in quantity demanded for unit change in price)

Quantity

Other determinants include:

• Substitute prices: independently priced alternatives increase the ability to switch.
• Time: demand often becomes more elastic as customers gain time to find or adopt alternatives.
• Necessity: essential goods tend to be less elastic than discretionary purchases, all else equal.
• Budget share: items consuming more of income usually provoke more adjustment.
• Brand and identity: attachment, habit or status can reduce responsiveness within a relevant range.

Elasticity is not a permanent property of a product. It varies by segment, geography, channel, time horizon, starting price and size of change.

How to use it

For a price reduction, state the volume or share increase required to improve contribution and derive the implied elasticity. For an increase, estimate the expected volume loss, customer migration and competitor response. Check whether assumptions match historical tests, customer research and comparable products.

Typical price elasticities of demand

| –1.5 | Elastic | Wine, theatre tickets, saloon cars | | –1.0 | Inelastic | Cinema visits, soft drinks, low-cost air tickets | | –0.5 | Highly inelastic | Petrol, beer, bread | | > 0 | Giffen good Veblen good | Kerosene, potato, moonshine Champagne |

Use the benchmark table as a reasonableness check, not as a substitute for measurement. Niche products rarely have a published estimate that fits their exact market. Where possible, run controlled tests, use transaction data and model profit—not revenue or volume alone—across a range of responses.

Top practical tip

Translate a proposed price change into its required and expected volume response, then test the implied elasticity against evidence and contribution economics.

Top pitfall

Do not import a web estimate from a broad category into a specialised offer without checking segment, geography, time horizon and starting price.

Further reading

• Marshall, A. (eighteen ninety). Principles of Economics. Macmillan.
• Nagle, T.T., Hogan, J.E. and Zale, J. (twenty sixteen). The Strategy and Tactics of Pricing. Routledge.