Stop using conventional price elasticity in your deposit pricing decisions. It is flawed and produces erroneous results. Start using Relasticity instead.

Conventional price elasticity of demand is a simplistic and elementary formula that has mathematical and economic deficiencies when applied to price (rates) and demand (balances) of deposit products:

To overcome these deficiencies in the conventional price elasticity model, bankers should use the Relasticity method to determine the true impact rates have on demand for deposit accounts. Starting January, every Deposits Dynamics forecast will include Relasticity analysis of all major deposit accounts allowing bankers to make the right pricing decisions based on how truly relevant the rate is in shifting demand.

Conventional price elasticity of demand is a simplistic and elementary formula that has mathematical and economic deficiencies when applied to price (rates) and demand (balances) of deposit products:

- It does not recognize inverse relations between price and demand.
- It assumes that rates and balances of deposits operate in a vacuum.

**Mathematical deficiency**- Conventional price elasticity model cannot handle inverse relations between rates (price) and balances (demand) due to its mathematical deficiency. Conventional elasticity coefficients are always positive and cannot articulate inverse relations. In reality, the relation between price and balance is often inverse. For example, between 2007 and now, the national average rate of MM accounts decreased by 92 percent, while national balances increased by 88 percent (See graph). The conventional elasticity coefficient is 0.86 (88%/92%), which means nearly unit elastic. Clearly that is not the case and any pricing decision based on that will result in a waste of interest expense.**Economic deficiency**– Conventional price elasticity measures the relations between interest rates and balances of deposits as if they are the only two factors impacting demand. That is never the case because the economic environment is always a factor. In other words, the economic environment can change the relations, so called “elasticity”, between price and balances even if the there has been no in the rate. Case in point. In the past two years, the national average rate of MM accounts stayed flat, while balances nationally grew by 12 percent. Was the increase in demand due to the rate? Not at all. It was solely the result of the economic environment, which impacted demand for MM accounts.To overcome these deficiencies in the conventional price elasticity model, bankers should use the Relasticity method to determine the true impact rates have on demand for deposit accounts. Starting January, every Deposits Dynamics forecast will include Relasticity analysis of all major deposit accounts allowing bankers to make the right pricing decisions based on how truly relevant the rate is in shifting demand.