A2.02.05: Importance of PED

Question 1

How is PED important for businesses (give 2 reasons)

Answer 1

• 1. Important for businesses when making pricing decisions to increase total revenue:
• PED > 1 (elastic), P decreases = TR increases
• PED < 1 (inelastic), P increases = TR increases
• 2. Important for employment, stocks and output purposes
• If a business knows demand for a product is price elastic and the price is going to decrease soon, it needs to be prepared for an extension in quantity demanded; Have to make sure it can produce them by either employing more people, increasing productivity of workers, increasing level of stock etc

Question 2

How is PED important for governments?

Answer 2

• Government taxes on products and elasticity will have an impact on their revenue; If demand falls, less workers are needed therefore, governments will put taxes on inelastic goods to maximise government revenue