1.2.4 Price elasticity of demand Flashcards
definition of PED
measures the extent to which the quantity of a product demanded is affected by a change in price
formula for PED
% change in quantity demanded
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% change in price
If its price elastic
- PED is more than 1
- change in demand is more than the change in price
if its price inelastic
- PED is less than 1
- Change in demand is less than the change in price
if its Unitary price elasticity
- PED is exactly 1
- Change in demand = change in price
How does brand strength affect PED
- loyalty and reputation = price inelastic
- because loyal customers wont 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
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
- small decrease in demand will cause large increase in demand
what is the relationship between price inelastic products and sales revenue
- price increase
- sale revenues go up
- money lost from % decrease in sale will be less than money gained from the % increase in price
- decrease in price will make sales go up, but revenue go down
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
