1.2.2 supply Flashcards
What is the definition of PED?
Measures the extent to which the quantity of a product demanded is affected by a change in price.
What is the formula for PED?
% change in quantity demanded
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% change in price
What does it mean if PED is more than 1?
Change in demand is more than the change in price.
What does it mean if PED is less than 1?
Change in demand is less than the change in price.
What does it mean if PED is exactly 1?
Change in demand = change in price.
How does brand strength affect PED?
Loyalty and reputation = price inelastic because loyal customers won’t switch even if the price goes up.
How does necessity affect PED?
Necessary products are price inelastic; changing price doesn’t affect demand. However, if customers can switch to a substitute, demand will be price elastic.
How does habit affect PED?
Products that are demanded and consumed as a matter of habit tend to be price inelastic.
What is the formula for sales revenue?
Sales revenue = selling price x selling volume.
What is the relationship between price elastic products and sales revenue?
Price increase: sale revenues go down. Money lost from % decrease in sales will be more than money gained from % increase in price.
What is the relationship between price inelastic products and sales revenue?
Price increase: sale revenues go up. Money lost from % decrease in sales will be less than money gained from the % increase in price.
How does price elasticity help a business?
If product is elastic: set low and competitive prices, increase revenue. If product is inelastic: set high prices and use price skimming, increase revenue.
