#economics #ped #priceelasticity #priceinelasticity #salesandrevenue

Price Elasticity Of Demand

• When a products price changes causing a substitution to the product in supply or demand, this known as price elasticity of demand, substitution is used in this case but y ? let's assume product A lost a lot of demand as its price increases, when product A demand decreases the supplier substitutes the supply of product from product A to product B, now if product B has demand, the supplier has successfully got of a situation of having a product with low demand.

• Any PED of a product which has a value more than 1 is considered price elasticity

Price Inelasticity Of Demand

• These kind of products have no change in there demand, if there is a big amount of change in price, the demand will have no change as these kind of products are really addictive. But the prices of these kind of products are highly controlled by the government so the suppliers cannot keep the price high

• Example : Tobacco, Alcohol, Drugs And Etc

Relation Of PED And Sales And Revenue

• As in one of my cards i mentioned about sales and revenue, now we are going to talk about it relating to a ped aspect

• The change in price of a product and change the quantity which results in change sales and revenue, this change is calculated from PED

• Example : let's assume the price of a single laptop costs 700 dollars with around 5000 of them sold in the market, now let's assume the price falls by 50 dollars resulting up to 650 dollars resulting in a increase of quantity by 500 units which is 5500

• PED Calculation : 5500 - 5000 / 5000 * 100 = +10%

  
  

  650 - 700 / 700 * 100 = -7.14%

  
  

  10/-7.14 = -1.4

  
  

Graph Analysation

• Let's assume the price of the product was inelastic and the price is less, if the price is increased there might be a reduction in quantity but the revenue will have a great increase from this change

• Alert : This graph talks about a product which is price Inelasticity, increase in price wont affect these kind of products.

• Let's assume this product is a price elastic and price of the product is pretty high, the demand in this case will be low and you can also see how small the quantity is, if the price of product decreases then the sales increase as the quantity increases and demand also increases as the price falls

• Alert : This product is price elastic

Significance Of PED For Decision Makers

• Helping producers to decide on their pricing strategy : A business who supplies products which are price inelastic can easily know that these kind of products are addictive and they can increase the price of that product, this is one of the example

• Price discrimination : this occurs when firms charge different customers different prices for essentially the same product because of differences in their PED.

• Deciding which products to impose sales taxes : on taxing price inelastic products ensures the government can collect large sums of tax revenue without seriously affecting the overall demand for the product (so there is minimal impact on sales revenues and jobs).

• Determining taxation policies : knowledge of PED can help governments to determine taxation policies. For example, the government can impose heavy taxes on demerit goods, such as petrol and cigarettes, knowing that the demand for these products is price inelastic. As demerit goods are harmful to society as a whole, the government needs to impose very high level of taxes on such products in order to reduce the quantity of demand.