Income & Promotional Elasticity
Data Interpretation Quiz | Cambridge 9609 Topic 8.1.4
15
60
AO1-AO4
Define "Income Elasticity of Demand" (YED).
State the formula for calculating Income Elasticity of Demand.
Define an "inferior good" in the context of income elasticity.
What does a YED value of +1.8 indicate about a product?
Define "Promotional Elasticity of Demand".
Key Concepts Tested
Income Elasticity (YED)
- • YED > +1: Luxury goods (demand highly responsive to income)
- • YED between 0 and +1: Normal necessities (income inelastic)
- • YED < 0: Inferior goods (demand falls as income rises)
- • Strategic use: Forecasting demand during economic cycles
Promotional Elasticity
- • High elasticity (>1): Advertising is highly effective
- • Low elasticity (<1): Diminishing returns on ad spending
- • Strategic use: Optimizing marketing budget allocation
- • Beware: Elasticity changes as spending scales up (saturation)
Strategic Application Framework
Master students understand that elasticity data alone doesn't dictate strategy. Real business decisions must weigh elasticity insights against capacity constraints, profit margins, competitive dynamics, brand positioning, and cash flow requirements. The "It Depends On" and "Most Important Factor" components of AJIM evaluation demonstrate this higher-level strategic thinking that separates A* responses from basic analysis.
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