1.2.4 Price elasticity of demand Flashcards
what is price elasticity of demand?
measures the responsiveness of demand for a product to change in its price
price elasticity of demand equation
= % change in quantity demanded / % change in price
what happens to demand with price elasticity?
if price changes, demand will change more
-elasticity is a negative number greater than 1
(more sensitive to price changes)
what happens to demand with price inelasticity?
if price changes, demand will change less
-elasticity is between 0 and -1
(less sensitive to price changes)
effects of price change on revenue
(price elastic product)
increase in price causes a….
fall in revenue
(small increase leads to large fall in demand)
effects of price change on revenue
(price elastic product)
decrease in price causes a….
rise in revenue
(small cut in price leads to a large increase in demand)
effects of price change on revenue
(price inelastic product)
increase in price causes a….
increase in revenue
(increase in price leads to small fall in demand)
effects of price change on revenue
(price inelastic product)
decrease in price causes a….
decrease in revenue
(price cut causes a small increase in demand)
how does predicting price and sales help businesses?
predicting this relationship helps business make more informed decisions
what influences price elasticity?
-degree of product differentiation
-availability of direct substitutes
-branding and brand loyalty
how can price elasticity be useful?
-can help in sales forecasting, considering likely impact of planned future price changes
-knowledge of price elasticity can help decide on what the best pricing strategy for increasing revenue is
how can price elasticity values change over time?
-in a competitive market, firms actions will affect the extent to which their product stands outs from rivals
-the unpredictability can undermine the usefulness of this
(hard to know until after the change in price and the affect has been measured)
