Correlation and elasticity
Correlation
- Correlation measures how strongly two things move together (e.g. advertising and sales).
- positive — both rise together; negative — one rises as the other falls.
- Strong correlation helps prediction, but it does not prove that one causes the other.
Practice
Positive correlation between advertising and sales means:
Positive correlation = both move the same way; it does not prove advertising causes the sales.
Practice
Strong correlation proves that one variable causes the other.
Correlation is not causation — other factors may be at work.
Elasticity in decisions
- PED — for a price elastic product, cut price to raise revenue; for price inelastic, raise price.
- YED — how sales change as incomes rise/fall (plan for booms and recessions).
- XED — how a rival's price change affects your sales.
Practice
For a price-inelastic product, a firm can raise revenue by:
Inelastic demand barely falls when price rises, so raising price raises revenue.
You've got it
Key idea
- correlation: positive (rise together) or negative; it does not prove causation
- PED guides pricing (elastic → cut price; inelastic → raise price)
- YED = income reaction; XED = reaction to another product's price