Analyzing Elasticity of Demand: A Case Study of Emma's Boutique Pricing Strategy
Overview
This paper analyzes the elasticity of demand for Emma's Boutique clothing items using survey data to evaluate price elasticity, income elasticity, and cross-price elasticity. The analysis demonstrates that Emma's products exhibit elastic price demand, income-elastic demand characteristics of luxury goods, and strong substitutability with competitor items, leading to strategic pricing and marketing recommendations.
What this case study covers
- Price Elasticity of Demand: Calculation showing PED of -1.67, indicating elastic demand where price increases reduce total revenue
- Income Elasticity of Demand: YED calculation of 1.18 classifying clothing as luxury goods with high income sensitivity
- Cross-Price Elasticity of Demand: XED analysis of 1.57 confirming goods are substitutes with direct competition impact
Preview
Analyzing Elasticity of Demand
Donald Ngonyo
University of the People
BUS 1103 – Microeconomics
Ogochuku Fisher
February 16, 2026
Analyzing Elasticity of Demand
Elasticity of demand measures how responsive quantity demanded is to changes in price, income, or related prices, providing critical insights for pricing, revenue, and competitive strategies in retail (Shapiro et al., 2023). Emma’s Boutique, facing declining sales, uses survey data to evaluate price elasticity of demand (PED), income elasticity of demand (YED), and cross-price elasticity of demand (XED) for her clothing items.
Price Elasticity of Demand (PED)
PED quantifies the percentage change in quantity demanded relative to a percentage change in price, using the midpoint method for accuracy: PED = [(Q2 - Q1) / ((Q1 + Q2)/2)] / [(P2 - P1) / ((P1 + P2)/2)]. In this regard, for Emma’s item, price rose from $50 to $60 (20% increase), and quantity demanded fell from 150 to 100 units (33.33% decrease). Therefore, PED = (-33.33%) / (20%) = -1.67 (absolute value 1.67 > 1). So, demand is price elastic.
This implies that price increases reduce total revenue because the percentage drop in quantity exceeds the percentage rise in price. Emma should avoid raising prices broadly, as it would lower revenue. Instead, she could lower prices to stimulate sales volume and increase revenue in the elastic range, or focus promotions on price-sensitive customers.
Income Elasticity of Demand (YED)
YED measures percentage change in quantity demanded relative to percentage change in income: YED = [(Q2 - Q1) / ((Q1 + Q2)/2)] / [(I2 - I1) / ((I1 + I2)/2)].