Understanding Markets And Customers

Question 1

Define PED (price elasticity of demand)

Answer 1

This measures the extent to which a change in price affects demand eg how sensitive demand is to price change

Question 2

What is PED concerned with ?

Answer 2

Concerned with the size of the change in demand

Question 3

What is the relationship between price and demand?

Answer 3

As price increase demand decreases negative correlation

Question 4

What is the equation for PED

Answer 4

% change in quantity demanded /%change in price

All answers are negative

Question 5

What happens to price elastic demand as price falls?

Answer 5

Reduced price
Increased demand
%change in price cause a larger % change in demand
This will always be the case if the PED is greater than 1

Question 6

What happens to price elastic demand if price increases?

Answer 6

Demand decreases by a larger extent than the price change

Question 7

What happens to price elastic demand if price decreases?

Answer 7

Demand increases by a larger extent

Question 8

What happens to price inelastic demand if price increases?

Answer 8

Demand falls by a smaller extent

Question 9

What happens to price inelastic demand if price decreases?

Answer 9

Demand increased by a larger extent

Question 10

What factors affect PED

Answer 10

Availability of substitutes
Level of necessity
Brand loyalty
Proportion of income spent on a good
Time

Question 11

Describe how availability of substitutes would affect PED

Answer 11

If there are many substitutes then it is easy for customers to switch products if there is a price change causing relatively large changes in demand .Thereforr demand will be price elastic

Question 12

What is the demand if there is few or no substitutes?

Answer 12

Demand is price inelastic

Question 13

How does level of necessity affect PED

Answer 13

Necessities have to be bought and so demand will not change much if price changes causing demand to be price inelastic

Question 14

How does brand loyalty affect PEd?

Answer 14

If consumers are loyal to a brand they believe there to be no substitute causing demand to be price inelastic

Question 15

How does proportion of income spent on a good affect PED?

Answer 15

If the price of a good forms a small proportion of someone’s income ie cheap goods then a price change has little effect on demand as consumers can still afford it thus demand is price inelastic (price is a large proportion of income demand is price elastic)

Question 16

How does time affect PED?

Answer 16

The longer the time period the more time consumers have to adjust their buying habits after a price change .initially they may not search out substitutes but if the price keeps rising then they will causing demand to change by greater amounts and demand to become more price elastic over time

Question 17

What effect does a change in revenue have on price elasticity demand

Answer 17

If prices increase demand will fall by a larger extent
The fall in demand outweighs the rise in price so revenue falls

If price decreases demand will rise by a larger extent.thus if demand is price elastic price should be lower to increase revenue

Question 18

What happens to revenue when price changes and demand is price inelastic?

Answer 18

If price increases demand will fall by a smaller extent. The rise in price outweighs the fall in demand so revenue increases

If price decreases demand will incrws by a smaller extent
The fall in price outweighs the rise in demand so revenue falls thus if demand is price inelastic price should be increased to increase revenue

Question 19

How do you use PED?

Answer 19

Sales forecasting – a firm can estimate the effect on demand of a price change. Once a sales forecast has been produced the firm can then decisions about production, personnel, and purchasing.

Pricing strategy – price can be changed to help maximise revenue and dust profit based on knowledge about PED

Question 20

What are the issues when measuring PED?

Answer 20

Can calculate what PED has been in the past by using past data, but that doesn’t mean the PED is still the same now as competitions levels may have changed along with consumer tastes

The PED is likely to change over a product life cycle. It’s likely to be very price elastic at the start as consumers aware of the new product become more elastic in the growth and maturity stage and then more price elastic will decline when consumers only buy it if the price is attractive

Question 21

What are the strategies to reduce PED?

Answer 21

Increasing product differentiation – this is the degree to which consumers perceive that our product is different I.e almost with without substitute. If firms can alter the image of a product in order to differentiate it then demand become more price in elastic.

Increase brand loyalty so consumers perceive there to be less substitute

Integration a firm takes over arrival then it’s reducing the number of substitutes a good has, reducing PED

Question 22

Why firms want to make demand price inelastic?

Answer 22

If the phone face is high cost (EGR material cost) then profit margins will reduce (profit margin equals amount of profit made on one unit) in order to maintain profit margins, firms can increase the price of the product. However, they would only want to do this at demand as price in elastic. If demand is price and elastic, price to reduce prices which reduces profit margin profit margin.

Question 23

What are case study examples of PED?

Answer 23

Disney – increased prices by 4% demand fell from 2% to one percent and its price in last – revenue will have increased. Want to price in elastic demand but they wanted more than 2% to solve the issue of overcrowding.

Netflix – gained 60 million new customers worldwide the first three months 2020 January 2021 increase prices assuming demand is price inelastic however we did not know if it is price and elastic. There is a lot of tough competition.

Question 24

What is income elasticity of demand?

Answer 24

It shows the correlation between demanding peoples incomes and measures responsive demand is to change in income

Question 25

What’s the equation for YED?

Answer 25

Percentage change in quantity demanded divided by percentage change in consumer income

Question 26

What does a positive positive YED answer mean?

Answer 26

An increase in income increases demand or decrease in income decreases demand. This happens for normal goods for example holiday.

Question 27

What is a negative YED answer mean mean?

Answer 27

As income increases the month falls and or as income falls demand increases this happens for inferior products for example Aldi

Question 28

Why do firms want to know about the YED?

Answer 28

Helps managers to plan for changes in their customers incomes for example:

If Incomes are rising and ED is positive and income elastic then demand will rise by larger extent managers then needs to ensure that they can cope with this in terms of production, staffing and finance

If YED is positive and incomes are falling then the demand will fall. The firm may choose to lower price.

If incomes are rising and YED is negative then demand will fall

Question 29

If the YED is less than one ignoring the sign, what is the result?

Answer 29

Income inelastic – changing income causes a smaller change in demand

(Most likely to be necessity )

Question 30

If the YED is more than one ignoring the sign, what is the result?

Answer 30

Income elastic changing income causes a larger change in demand
(Likely to be luxury )