Price elasticity of demand

In this lesson

1. 0:00 Pricing decisions and the management accountant's role
2. 1:01 The circular relationship between price, volume, and costs
3. 3:29 Understanding price elasticity of demand
4. 4:33 Inelastic demand and pricing strategy
5. 6:41 Elastic demand and market competition
6. 8:37 Factors affecting price elasticity of demand
7. 11:25 Calculating price elasticity: worked example

About this lesson

Understanding this concept gives you the freedom to set prices strategically: if demand is inelastic (less than 1), price increases typically boost revenue because customers remain relatively unresponsive; if demand is elastic (greater than 1), price decreases often win market share since customers are highly price-sensitive. The lesson explores the circular relationship between price, volume, and costs in a business. When you raise prices, demand typically falls, which reduces production volume and eliminates economies of scale, pushing unit costs up. This interconnection is particularly important if your business uses cost-plus pricing. You'll discover the key factors that determine elasticity: how much of a customer's income the purchase represents, whether the product is a necessity or luxury, and the availability of close substitutes. A chocolate bar has inelastic demand because it's a small purchase; a car has elastic demand because it's a major expense. Products with many competitors or close alternatives tend to be elastic, whilst monopoly products are inelastic. The lesson includes a worked example calculating price elasticity for faux fur blankets, walking through the formula step-by-step so you can apply it to real pricing scenarios. This concept is foundational to Performance Management and Financial Management modules across ACCA and CIMA qualifications, equipping you to advise on pricing strategy with confidence.

Duration: 15m