Other Demand Elasticities

Advertising elasticity plays an important role in marketing activities for a broad range of goods and services. A low advertising elasticity means that a firm must spend substantial sums to shift demand for its products through media-based promotion. In such cases, alternative marketing approaches—such as personal selling or direct marketing—are often more productive.

In the housing market, mortgage interest rates are an important determinant of demand. Accordingly, interest rate elasticities have been used to analyze and forecast the demand for housing construction. To be sure, this elasticity coefficient varies over time as other conditions in the economy change. Other things are held constant when measuring elasticity, but in the business world other things do not typically remain constant. Studies indicate that the interest rate elasticity of residential housing demand averages about -0.15. This means that a 10 percent rise in interest rates decreases the demand for housing by 1.5 percent, provided that all other variables remain unchanged. If Federal Reserve policy is expected to cause mortgage interest rates to rise from 6 percent to 8 percent (a 33 percent increase), a 4.95 percent decrease (= -0.15 X 33) in housing demand can be projected, on average.

Not surprisingly, public utilities calculate the weather elasticity of demand for their services. They measure weather using degree days as an indicator of average temperatures. This elasticity factor is used, in conjunction with weather forecasts, to anticipate service demand and peak-load conditions.

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