Applications of PED

Question 1

Total expenditure/total revenue

Answer 1

• total expenditure = total revenue earned by producer frm sale of gd before deducting taxes
• price x quantity bought/sold

Question 2

Price elastic demand

Answer 2

• PED 1 to infinity
• pricing strategy: decrease price
• increase price, TR/E on gd falls
• inverse relationship btwn price elastic demand and TR/TE
• draw diagram (De gentler slope)

Question 3

Price inelastic demand

Answer 3

• PED between 0 and 1
• pricing strategy: increase price
• price of gd rises, TR/TE rise
• positive/direct relationship btwn price-inelastic demand and TR/TE
• draw diagram Di (steeper slope)

Question 4

Applications of PED (Producers)

Answer 4

1. Pricing decisions
2. Output decisions
3. Other strategies

Question 5

Pricing decisions (Producers)

Answer 5

• helps producers make decisions on whether to increase or decrease price
• PRice elastic demand: Lower price to increase TR
• e.g. price discounts usually given on standardised but differentiated products ie. tissue paper
• Price inelastic demand: Rise price to increase TR

Question 6

Output decisions (Producers)

Answer 6

• decide on whether to mass produce good or not
• mass production lowers cost per unit
• efficient, raw materials in bulk (discount)

Question 7

Price elastic (output decision)

Answer 7

• fall in price increases TR
• should mass produce, lower price
• lower price x increase quantity = increased TR

Question 8

Price inelastic (output decision)

Answer 8

• rise in price x increased quantity = fall in TR

- mass production alone not a good business strategy

Question 9

Other strategies (Producers)

Answer 9

• make a good that is demand elastic (many substitutes) become demand inelastic (dun have to lower price)
• once Di, can increase price and increase TR
• product differentiation e.g. branding, promoting customer loyalty

Question 10

Government

Answer 10

1. Raise tax revenue

2. Discourage social consumption

Question 11

Raise tax revenue (Gov)

Answer 11

• raise revenue thru indirect taxation e.g.GST

- impose tax on good where demand is inelastic

Question 12

Effect of tax (Gov)

Answer 12

• rise in price of gd
• supply falls (tax is NPD)
• producer passes part of burden to consumers
• Di: fall in qdd less proportionate (more tax collected)
• De: fall in qdd more proportionate (less tax collected)
• draw graph

Question 13

Discourage consumption of socially-undesirable goods

Answer 13

• more demand elastic, more successful
• De: small amt of tax reduces consumption significantly
• Di: large amt of tax might not reduce consumption significantly ie. cigarettes, liquor ; very high tax needed /ban