business relevance to elasticities

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  • Created by: lizaloo98
  • Created on: 07-04-16 22:33
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  • Business Relevance to Elasticity
    • planning and total revenue
      • PED
        • inelastic firms will cause them to raise prices due to not much of a change in QD
        • elastic PED, will cause firms to decrease prices
        • used when pricing products in the market
      • YED
        • usually over time real disposabel incomes rise overtime
        • so over time, with incomes rising firms with positive YED, will expect to do well in the future
        • estimates of YED can provide a basis for forecasting future market demand
          • especially if the YED is specific
        • so only +'ve YED goods can see a good future as real disposable incomes generally rise
        • in a recession incomes will fall so normal goods will be affected, by a decrease in demand, as consumers will opt for inferior goods, so those wont be affected as much, as goods/services with +'ve YED
        • _'ve YED, will be affected less by reduction in living standards or incomes
      • XED
        • pasrticu8larly important in a competitive market, where there are close substitutes hence high +'ve XED, this is when firms willc ut their own prices to take shares from the other fiirms
          • e.g. low-cost airlines, virtually identical foods, wine produced in different countries
        • if XED is positive prices rising would be a bad idea, as consumers will go for the substitutes instead of that product, UNKLESS, that other firm rises its price., market share is only regained after that by reducing prices by alot and decreasing revenue by a lot
        • in the case of compliments, the effwect isnt as much as substitutes, this way businesses still look at the compliments to see how to eact to them
      • PES
        • always positive, but it is still difficult to switch resources in a market
          • exception to this is when firms hold stocks in anticipation of a price rise
        • more price elastic as time goes on, as producers have time to respond, and reallocate resources.
        • firms will try to make their supply as eklastic as possible, in hope they can gain the greatest revenue as price rises, by selling more goods/services.
          • elastic supply, allows them to move resources into alternatives, where the PES remains true and normal
    • why elasticity should be treated with caution
      • the figures are estimates, not exact figures as there may be some inaccruacies when data has been collected
      • over time is hard to collect data and prices over a wide range f goods, so its easier when they are closer to each other, to obtain
      • over time, elasticity changes
      • prices may fall any time
    • how elastcity is gained by these businesses.
      • surveys YED
      • past records PES
      • competitor analysis XED
      • computer analysis XED


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