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    Application of Ped

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    mohdportman
    - Price elasticity of demand (PED) is important for business decision making as it determines how changes in price impact total revenue. - If demand is price inelastic, an increase in price will decrease sales but increase total revenue, while a price decrease will increase sales but decrease total revenue. - If PED equals 1, total revenue remains unchanged with price changes as the proportional effects on price and quantity balance out. - Primary commodities like agricultural products tend to have inelastic demand due to being necessities without substitutes, while manufactured goods tend to have more elastic demand as they are luxuries with substitutable options. PED values influence how price changes impact businesses' total revenues.

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    Application of Ped

    Uploaded by

    mohdportman
    135 views11 pages
    - Price elasticity of demand (PED) is important for business decision making as it determines how changes in price impact total revenue. - If demand is price inelastic, an increase in price will decrease sales but increase total revenue, while a price decrease will increase sales but decrease total revenue. - If PED equals 1, total revenue remains unchanged with price changes as the proportional effects on price and quantity balance out. - Primary commodities like agricultural products tend to have inelastic demand due to being necessities without substitutes, while manufactured goods tend to have more elastic demand as they are luxuries with substitutable options. PED values influence how price changes impact businesses' total revenues.

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    Ped

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    - Price elasticity of demand (PED) is important for business decision making as it determines how changes in price impact total revenue. - If demand is price inelastic, an increase in price will decrease sales but increase total revenue, while a price decrease will increase sales but decrease total revenue. - If PED equals 1, total revenue remains unchanged with price changes as the proportional effects on price and quantity balance out. - Primary commodities like agricultural products tend to have inelastic demand due to being necessities without substitutes, while manufactured goods tend to have more elastic demand as they are luxuries with substitutable options. PED values influence how price changes impact businesses' total revenues.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    135 views11 pages

    Application of Ped

    Uploaded by

    mohdportman
    - Price elasticity of demand (PED) is important for business decision making as it determines how changes in price impact total revenue. - If demand is price inelastic, an increase in price will decrease sales but increase total revenue, while a price decrease will increase sales but decrease total revenue. - If PED equals 1, total revenue remains unchanged with price changes as the proportional effects on price and quantity balance out. - Primary commodities like agricultural products tend to have inelastic demand due to being necessities without substitutes, while manufactured goods tend to have more elastic demand as they are luxuries with substitutable options. PED values influence how price changes impact businesses' total revenues.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 11

    APPLICATION OF PED

    • PED and business decisions - the effect of price


    changes on revenue
    • PED is important for business decision making as it determines the
    effect of price changes on total revenue (PxQ). When a business is
    considering increasing or decreasing price, it is important to know the
    resulting impact on demand and therefore sales revenue.
    • Remember that if demand for a good or service is price inelastic then
    an increase in price will decrease sales but increase sales revenue
    • However, a price cut will increase sales but decrease sales revenue.
    • If price elasticity is 1, then revenue does not change with a change in
    price since the proportionate effects on price and quantity demanded
    are equal.
    PED and TR
    The changes in revenue for different values are table below
    elasticity summarised in the

    Price elasticity value Price change Impact on firm's revenue Explanation

    Elastic Increase Fall Elastic demand will mean that


    when price increases, demand will
    fall by a greater percentage than
    the price increased. This means a
    fall in revenue.
    Elastic Decrease Increase Elastic demand will mean that
    when price falls, demand will
    increase by a greater percentage
    than the price decreased. This
    means an increase in revenue.
    Inelastic Increase Increase Inelastic demand will mean that
    when price increases, demand will
    fall by a smaller percentage than
    the price increased. This means an
    increase in revenue.
    Inelastic Decrease Fall Inelastic demand will mean that
    when price falls, demand will
    increase by a smaller percentage
    than the price decreased. This
    means a fall in revenue.
    Small test
    • Explain the different degree / ranges of PED
    with the help of an diagram and with an
    relevant examples?
    • Define total revenue ? How profit is
    calculated? Distinguish between cost and
    revenue?
    • When the demand is inelastic.
    What happens to the total revenue and price?
    Define inelastic?
    PED - primary vs manufactured goods

    PRIMARY COMMODITIES MANUFACTURED PRODUCTS


    • GOODS DIRECTLY • PRODUCTS THAT HAVE
    ARISING FROM THE USE BEEN MADE FROM RAW
    OF NATURAL
    RESOURCES MATERIALS
    • EX: AGRICULTURAL , • EX: TV,CAR, MOBILE,
    FORESTRY PRODUCT,AS LAPTOP, FURNITURE
    WELL AS PRODUCTS OF
    EXTRACTIVE INDUSTRY
    (OIL,COAL,MINERALS)
    • Generally primary commodities have relatively low PED
    values (inelastic), while manufactured goods will tend
    to have higher values (more elastic).
    • The availability of close substitutes in the market. The
    more substitutes available the greater the elasticity.
    • Is the good a luxury or necessity? Luxuries are more
    elastic in demand than necessities.
    • Proportion of income spent on them. Cheap items
    tend to have an inelastic demand.
    • Are they addictive? These obviously become price
    inelastic.
    • The time period. Elasticity tends to increase with time.
    In the table below is a comparison of two products - wheat (a primary
    commodity) and laptops (a manufactured good) - against each of these
    determinants.

    Determinants Wheat Laptop

    Availability of close substitutes Relatively few substitutes - effectively a Reasonable number of substitutes
    necessity depending on precise task (e.g. tablet,
    computer )

    Luxury or necessity? Necessity Luxury

    Proportion of income spent Depends on nature of economy, but Depends on nature of economy, but
    generally relatively low generally relatively high - a one-off
    purchase

    Addictive N/A N/A (Unless you are a gamer?)

    Time period Used over a short period - consumed Used continously over a long period
    immediately

    Number of uses Single use - food Multiple uses - writing, searching,


    gaming...
    • This helps us see why primary commodities
    will generally have a lower elasticity value
    than manufactured goods which will tend to
    be higher value luxuries rather than
    necessities and therefore more elastic.
    PED IN RELATION TO PRIMARY AND
    MANUFACTURED GOOD

    Large price fluctuations over short periods of


    time are referred to as price volatility.
    THE PRICE OF PRIMAR PRODUCTS TEND TO BE
    MUCH VOLATILE - DUE TO CHANGE IN
    WEATHER CONDITION, NATURAL DISASTER-
    FLOODS, DROUGHT
    Many primary commodities have a relatively low
    PED (price inelastic demand) because they are
    necessities and have no substitutes (for example,
    food and oil).
    The PED of manufactured products is relatively high
    (price elastic demand) because they usually have
    substitutes.
    PED , INDIRECT TAX AND GOV
    REVENUE

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