The Price Elasticity of Demand and Celebrity Brands

The first associations that come to mind when one hears “the price elasticity of demand” probably aren’t MrBeast, Logan Paul or Kylie Jenner. In this blog post, I’ll explain what the price elasticity of demand is, factors that affect it, and how it could be connected to the companies of influencers like MrBeast, Paul or Jenner earning millions.

What Is Price Elasticity of Demand?

In basic terms, the price elasticity of demand is a measure of consumers’ sensitivity to changes in prices.

For example, consider gas price increases. The rate at which this price change affects demand is the price elasticity, or sensitivity. If a consumer’s demand is not much affected, meaning he reduces his purchase by a smaller percentage than the change in price, that consumer would be referred to as having an inelastic price elasticity of demand, or inelastic demand for short. On the other hand, if a consumer lowers his gas purchase by a larger percentage than the price increase, that consumer has an elastic demand.

Two extreme cases are “perfectly elastic” and “perfectly inelastic” demand.

• Perfectly elastic demand means that if the price increases at all, demand will fall to zero.
• Perfectly inelastic demand means that no matter how the price changes, demand for the product will remain exactly the same.

A 45-degree demand curve means that the percentage change in prices and the percentage change in quantity demanded are the same (assuming the axis units are in logs rather than levels).For a 45-degree demand curve with units in logs, a 1% change in price is associated with a 1% change in quantity demanded (in opposite directions), for instance. In contrast, if the units were in levels, the percentage changes in price and quantity would not be the same. Say, for example, that one unit of a good is purchased if the price is $100 but two units are purchased if the price is $99. In this case, the price decreased by 1% while the quantity increased by 100%, which is not one to one. These three cases are illustrated in the animation below.

What a Demand Curve Looks Like with Different Price Elasticity

What Determines Consumers’ Price Elasticity of Demand?

Among the many factors that can affect the price elasticity of demand for any given product are availability of substitutes, the percentage of income needed to buy the product, the necessity of the good and consumers’ brand loyalty to the product.

Availability of substitutes

If a consumer is purchasing a good with many substitutes, demand for that good will be much more elastic. If there are 10 brands of lipstick and one brand raises prices, it is easy to buy a different brand. Conversely, someone buying a plane ticket to Australia may only have a couple of options. If the price for a ticket increases, the consumer may still have to buy that ticket or not make the trip.

Percentage of income

The lower the percentage of a consumer’s income it takes to buy a good, the more inelastic the demand. When the price of milk or eggs increases 20%, we may grumble about it, but likely will continue to purchase those products. However, if there is a 20% price increase on cars, consumers may delay the purchase or abandon it altogether.

Necessity of the good

The more necessary a good is, the more inelastic the demand is for it. Utilities are a good example of inelastic goods. If the price of electricity or natural gas goes up, consumers can ration how much they use, but they most likely will not turn off their refrigerators or stop cooking on their stoves.

Brand loyalty

If a product is associated with a brand that consumers identify with or respect, their demand is more inelastic, meaning that price increases will be less likely to deter them from buying the good. Historically, brand loyalty has been tied to big name companies such as Macy’s Inc., or The Walt Disney Co. Recently, however, there has been a large increase in brand loyalty to individuals.

Celebrity- and Influencer-Owned Brands

In the past 10 years, a number of celebrity- or influencer-owned brands have taken off, possibly in large part because of brand loyalty to the celebrity or influencer. Take, for example, Kylie Cosmetics, founded by reality star Kylie Jenner, YouTube star MrBeast’s Feastables (among other MrBeast brands), or YouTube stars KSI and Logan Paul’s Prime. All three companies are in markets—for makeup, candy, and energy and sports drinks—that have high competition and long-established companies. Thus, these companies are in markets with many available substitutes and for goods that are not necessary—factors that would typically imply relatively elastic demand. While these products cost a low percentage of income, they seem to rely on brand loyalty to the owners to create relatively inelastic demand their products.

Kylie Cosmetics has been around since 2014, but Feastables and Prime were founded recently, in 2022. Feastables sold $10 million worth of chocolate bars in the company’s first four months, according to a May 9, 2022, Business Insider article. Prime was set to pass $1.2 billion in sales in 2023, as a Bloomberg article reported in November 2023.

What might explain the companies’ quick rise to large revenue? Given the popularity of their owners and the availability of many substitutes, a primary driver of demand for these products may be the influencer brand attached to them.

For example, Prime is slightly healthier and more well balanced than Gatorade, according to a Jan. 4, 2024, review in Sports Illustrated, but it also costs about $10 more per 12-pack.The original review can be found via the Wayback Machine. The fact that Prime is set at a higher price could indicate some price inelasticity: Although other products are cheaper, the product still is popular with consumers, and it sold out in stores in the United Kingdom and Australia when it was first released, signs that consumers buy it based on the association with the celebrities rather than quality or price. Additionally, there was a marked-up resale market for Prime drinks at schools in the United Kingdom, where it was described as a “status symbol for teens.”

Another explanation is that celebrity owners have significantly reduced marketing costs or increased access to capital for these companies.

How might the demand for these products change if their prices increased—that is, what is consumers’ price elasticity of demand for these products? Knowing that might give some insights to the impact brand loyalty plays on the success of these products.

Want to Learn More about Price Elasticity of Demand?

Check out three videos from the St. Louis Fed’s Economic Education team explaining price elasticity of demand, including this one, which gives examples of how businesses and government can use the concept.

Transcript

Price elasticity of demand is not just a cool concept. It has important implications for people in your community.

Can you guess who they are?

Businesspeople and policymakers. Knowing whether a good is likely to be price elastic or price inelastic could help guide business decisions about price changes and government decisions about taxes. Here’s how.

If you owned a business, it would be useful to know how a change in the price of the good you sell would influence the amount of money you bring in, which is your revenue. Your revenue is calculated by multiplying the amount of a good sold by the price charged for that good.

Imagine you own a firm that sells widgets. If demand for widgets is relatively price elastic and you decide to increase the price by 10%, you could expect the quantity you sell to decrease by more than 10%, which means your revenue would decrease. In this case, by increasing your price, you’d bring in less money.

But if demand for widgets is relatively price inelastic, and you decide to increase the price by 10%, you could expect the quantity demanded to fall—due to the law of demand. But since the demand is relatively inelastic, the quantity demanded would fall by less than 10%, which means your revenue would increase. By increasing the price, you’d bring in more money.

For policymakers, understanding the price elasticity of demand may help them consider consequences when designing tax policy.

When the price of an inelastic good increases, consumers generally don’t reduce their consumption by very much, relatively speaking. So, so raising the tax on those goods will result in higher tax revenues. If the goal is to raise tax revenue, policymakers might consider increasing the tax on inelastic goods.

However, if a good is price elastic, an increase in the tax on that good would likely reduce the quantity of the good consumers demand by a greater percentage than the price increase. Tax revenues would likely fall. However, if the goal of the tax is to discourage the use of good or service, raising the tax on a good that is price elastic can help accomplish that goal.

Well, snap! We’re out of time. I hope you feel a little stretched by this experience. Thanks for watching.

Note

1. For a 45-degree demand curve with units in logs, a 1% change in price is associated with a 1% change in quantity demanded (in opposite directions), for instance. In contrast, if the units were in levels, the percentage changes in price and quantity would not be the same. Say, for example, that one unit of a good is purchased if the price is $100 but two units are purchased if the price is $99. In this case, the price decreased by 1% while the quantity increased by 100%, which is not one to one.
2. The original review can be found via the Wayback Machine.