Price of elasticity demand Flashcards
Price elasticity of demand (PED)
-The responsiveness of the quantity demand to changes in price (How will the quantity demanded change if there is a change in price)
Elastic Demand
-If a small change in price causes a big change in quantity demanded
Goods that have elastic demand:
- Lower price will increase Total Revenue
- Higher price will decrease Total Revenue
The formula for calculating change in price is:
change or gap in price/original price × 100
PED = % change in quantity demand/% change in price
Inelastic demand
-If a small change in price causes a smaller change in quantity demanded (price change has a small influence on quantity demanded)
Goods that have an inelastic demand:
- higher price will increase Total Revenue (people will still buy the same quantity even if price is high, e.g. salt, alcohol.)
- lower price will decrease Total Revenue
Factors affected price elasticity of demand
- The availability of substitutes
- Share of household income spent on the product
- Habit-forming goods
- Whether it is a luxury or a necessity.
PRICE ELASTICITY OF SUPPLY (PES)
-The responsiveness of the quantity supplied to a change in price. (How will the quantity supplied change if there is a change in price)
Elastic supply
-If a small change in price causes a big change in the quantity supplied.
Formula to calculate PES
change between the quantity supplied/original quantity supplied X 100.
Inelastic supply
-If a small change in price causes a smaller change in quantity supplied.
(Price change has a small influence on the quantity supplied)
Advertising
-Advertising is informing and persuading potential customers to buy a product.
Purpose of advertising
increase the demand for a good or a service
Advantages of advertising:
- Consumers can compare products before buying
- Increase in the demand and sales of products and services
- Advertisers pay sponsorships for sport teams, etc.
Disadvantages of advertising:
-Advertising is expensive
-Can mislead consumers
-Harmful (demerit) goods can be advertised, e.g. cigarettes and alcohol
May lead to dissatisfaction, consumers may get upset because they cannot afford the advertised
goods and services
Methods of advertising:
Cinema
-Reaches people who are watching the film and therefore only reaches a limited amount of people using sound and visual
Trade Fairs/Exhibitions
-Popular form of advertising products of a particular industry
Does advertising raise costs?
Does advertising raise costs?
No:
If the advertising leads to an increase in demand (sales), the average advertising cost will decrease over the long term.
Yes:
If advertising does not lead to an increase in demand (sales), advertising costs will decrease the profit of a firm.
Pricing polices
Price discrimination
-charge different prices for different: market segments/hours
Pricing polices
Price skimming
-charge a higher price for a new product on the market
Pricing policies
Penetration pricing
-Initial price lower than those of existing competitors to get into market
many competitors in market
Pricing policies
Destroyer pricing
-charge very low to drive competitors out of market
Pricing policies
Competition-based pricing
-prices set in line with competitor to obtain and maintain market share
Pricing policies
Perceived value pricing
-based on consumers perception
(high price for quality goods)
(low price for “value for money” goods
Market
anywhere where the exchange of buying and selling of goods and services takes place for money
