A-Level tip: Businesses with inelastic demand (like Apple) can raise prices to maximise revenue. Businesses with elastic demand must compete on price or invest in brand loyalty to reduce elasticity.
Income Elasticity
Income Elasticity of Demand (YED)
Formula
YED = % change in quantity demanded ÷ % change in income
Example: Income rises 5%, demand for holidays rises 15% → YED = +3 (luxury normal good)
Normal good (YED > 0): Demand rises as income rises — e.g. new cars, restaurant meals, foreign holidays
Luxury normal good (YED > 1): Demand rises proportionally more than income — premium products, status goods
Inferior good (YED < 0): Demand falls as income rises — e.g. value supermarket ranges, bus travel vs car
Business application: In a recession, luxury goods businesses suffer most; inferior good producers may benefit
Exam application: If a question describes an economic boom or recession, YED is the relevant concept — it links macroeconomic conditions to demand for specific products.
STP: Step 1
Market Segmentation
Definition
Segmentation divides a heterogeneous market into distinct groups of consumers who share similar needs, characteristics or behaviours — so the business can target each group differently.
Demographic
Age, gender, income, occupation, family size. Most widely used — data is relatively easy to collect.
Geographic
Country, region, urban vs rural, climate. Important for retail location and international marketing.
Psychographic
Lifestyle, values, attitudes, personality. Harder to measure but highly powerful for brand positioning.
Behavioural
Purchase frequency, brand loyalty, usage rate, benefits sought. Increasingly enabled by big data.
Benefit
What customers want from the product — convenience, status, economy, quality, innovation.
B2B Segmentation
Industry, company size, purchase behaviour — different approach for business customers vs consumers.
STP: Step 2
Targeting Strategies
Undifferentiated (mass marketing): One product for the whole market — economies of scale; no tailoring. Works when needs are homogeneous (e.g. salt, petrol)
Differentiated (segmented): Different marketing mix for each segment — higher cost but better match to needs. E.g. car manufacturers offering economy, family, executive, sports ranges
Concentrated (niche): One segment targeted exclusively — deep expertise; higher price; vulnerable to competitive entry or segment decline. E.g. Rolls-Royce, Farrow & Ball paint
Micro/personalised: Individual-level targeting enabled by big data — e.g. Amazon recommendations, Spotify playlists; very expensive; privacy concerns
STP: Step 3
Positioning & Perceptual Maps
What is Positioning?
Positioning defines how a brand occupies a place in the consumer's mind relative to competitors — on dimensions like price, quality, status or innovation.
Evaluation: The value of market research depends on sample size, sampling method (random vs quota), question design and how up-to-date it is. Big data is transforming research — real-time behavioural data from apps, cards and browsing replaces traditional surveys for many decisions.
Strategic Application
Linking Elasticity to Marketing Decisions
Inelastic demand → premium pricing: Strong brand allows price rises without demand loss; Apple raises iPhone prices yearly
Elastic demand → promotion investment: Build brand loyalty to shift demand curve right and reduce PED over time
YED > 1 products → growth markets: Premium brands benefit most from economic booms; luxury cars, designer goods, premium travel
Inferior goods → recession strategy: Value retailers (Aldi, Primark) and budget services can position as "smart spend" when consumers trade down
Practice Question 1
A coffee brand raises its price by 5%. Demand falls by 2%. What is the PED and what does this mean for total revenue?
APED = −0.4; price inelastic; total revenue increases
BPED = −2.5; price elastic; total revenue falls
CPED = −0.4; price elastic; total revenue falls
DPED = −2.5; price inelastic; total revenue increases
A is correct. PED = −2 ÷ 5 = −0.4 (ignoring sign: 0.4 < 1 = inelastic). When demand is inelastic, a price rise increases total revenue — the extra revenue from the price increase outweighs the small loss of customers. Coffee with brand loyalty is typically price inelastic.
Practice Question 2
A travel company sells luxury cruises. As UK household income rises by 4%, demand for cruises rises by 12%. What type of good is this and what is its YED?
AInferior good; YED = −3
BLuxury normal good; YED = +3
CNormal good; YED = +0.33
DNormal good; YED = +3, income inelastic
B is correct. YED = 12 ÷ 4 = +3. Positive YED = normal good (demand rises with income). YED > 1 = luxury normal good (demand rises proportionally more than income). Cruises are a classic luxury item. This means demand is highly sensitive to economic conditions — cruises would suffer badly in a recession.
Practice Question 3
A children's toy company segments its market by age group (0–2, 3–5, 6–9, 10–12) and designs distinct products for each group. This is an example of:
AConcentrated (niche) targeting strategy
BUndifferentiated (mass) marketing strategy
CDifferentiated targeting using demographic segmentation
DPsychographic segmentation based on lifestyle
C is correct. Age-group segmentation is demographic. Designing distinct products for each age group = differentiated targeting strategy (different mix for each segment). Concentrated targeting (A) would mean focusing on just one age group exclusively; undifferentiated (B) would be one toy for all ages.