PED(price elastic demand)
- Created by: Manda1000
- Created on: 10-01-17 11:11
Definition of price elastic demand
vPrice elasticity of demand is a measure of how responsive demand is to a change in price
inverse relationship between price and demand
vAs price goes up demand goes down vAs price goes down demand goes up
IMPORTANT
¤If PED is between 0 and -1 e.g. -0.7 then demand is price inelastic ¤If PED is less than -1 e.g. -1.4 then demand is price elastic
Factors influencing PED
vThe availability of substitutes – the closer the substitutes and the more that are available the higher the price elasticity of demand
Factors influencing PED
vThe price of competitor goods – if the price of goods in competition with a product increase this will affect demand and price elasticity of demand
Factors influencing PED
vTime– the longer the time period the higher the price elasticity of demand. Given more time other firms have the ability to produce similar products and customers have more chance of adapting their buying habits
Factors influencing PED
vBranding– firms spend time and money building up their brand image. By creating brand loyalty firms know that their customers will be willing to pay more for the product and they can therefore raise prices as the PED is lower
Factors influencing PED
vIncome - if consumer incomes are higher then the issue of price becomes less important to the consumer and it is easier for firms to raise price as the PED is lower
Factors influencing PED
vNature of the good va luxury good will be price elastic as demand will be more sensitive to changes in price va necessity good will be price inelastic as demand will be less sensitive to changes in price
IMPORTANT
Price elastic demand
Price inelastic demand
Raise selling price
Sales revenue will decrease
Sales revenue will increase
Lower selling price
Sales revenue will increase
Sales revenue will decrease
Rearranging the formula
Problems of forecasting price elasticity of demand
vThe price elasticity of demand for a product is constantly changing in a dynamic world vIt is very difficult for firms to measure because: vDifficulty in finding accurate information vPrice elasticity changes over different price ranges vPrice elasticity will change over the period of the economic cycle e.g. it will be affected in a recession vTastes and fashions are constantly changing vCompetitors don’t stand still vThey are continually improving existing products, bringing out new products and trying to promote their products
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