2.2: Firms, consumers and elasticities of demand Flashcards
What does PED measure?
The responsiveness of demand to a change in price
Why is PED important to firms?
changing price can drastically affect revenue –> profit
use branding and advertising to make it seem as though they are no close substitutes
need to know what happens if they change their price
In what type of market is PED more important?
mass markets: goods and services likely to be standardised and have many substitutes
price changes can have a much larger proportional effect on demand
Why is PED less important in niche markets?
Rely much less on having competitive prices as they are more specialised and have fewer substitutes
price changes have less impact on demand
What is the formula for PED?
% change in quantity demanded / % change in price
What happens when a good is price elastic?
price change causes a proportionately bigger change in demand
% change in Q is bigger than % change in P
bigger than -1
What happens when a good has unit price elasticity?
price change causes the same proportional change in quantity demanded
% change in Q is the same as % change in P
-1
What happens when a good is price inelastic?
price change causes a proportionally smaller change in quantity demanded
% change in Q is smaller than the % change in P
between 0 and -1
Name the factors that influence the price elasticity of demand.
number and closeness of substitutes
luxury or necessity
proportion of income spent on a good
time scale
How does number and closeness of substitutes affect PED?
more substitutes = more price elastic
nescafe + maxwell house = close substitutes BUT tea + coffee arent
How does luxury or necessity affect PED?
luxuries more price elastic unless status symbol
necessities more price inelastic
How does proportion of income spent on a good affect PED?
if toothpaste price increases by 10%, sales will hardly change
if car price increases by 10%, sales likely to fall significsntly
How does time scale affect PED?
short term goods more price inelastic
long term substitues can be found
What is a pricing strategy?
the way in which a business decides upon the price of its product or service
What is cost-plus pricing?
price decided by adding a fixed percentage profit to the cost
What is price skimming?
charging a very high initial price for the product
products that are new and different = new iPhone
well established business
What is penetration pricing?
setting a low price to persuade consumers to buy good
business wants to penetrate market ang gain market share
What is premium pricing?
higher price charged than competition - product seen as being more desirable or better quality
CocaCola or Apple - branded and innovative products
What is predatory pricing?
setting price below cost of production to drive rivals out of market
illegal in UK
What is competitive pricing?
making prices similar or slightly less than competitors
products similar in nature
What is psychological pricing?
prices rounded down slightly to make them sound more appealing
£10 to £9.99
Name the factors that determine the most appropriate pricing strategy
Amount of differentiation
PED
strength of brand
stage in plc
costs and need for profit
How does the amount of differentiation affect the pricing strategy?
higher degree of differentiation, higher price (premium or skimming)
little differentiation (competitive)
How does PED affect pricing strategy?
low PED = premium or skimming
high PED = competitive or undercutting
