PRICE ELASTICITY OF DEMAND
PED Responsiveness
:
of
quantity demanded toachangeinprice
=
-1.1in Qd
i. Ain P
Values
Elastic :PED > 1 Inelastic :PEDC1
PP=tQd more than AP -
-
told less than
T
-
q
- -
t
T
f
1-
. - -
i
proportionately ,
proportionately
I.
. . -
!
c-
Evaluate the determinants of PED
103 104
Determinants
Availability of •
Elastic -1> lftherearemanycletesubstitulesavaiable •
Depends onqualityot substitutes wiubereluctanttochange
-
Clotlsubstitutt tip :bQdmorethanpropasconsumerswiubuy cheaper substitutes itotlow quality -
consumers will payextratorhigher
•
Inelastic -1>
Hnotmanyclote substitutes are available quality than lower
tp-bQdlessthanprop.aslonsumershare.no other choice Depends upon brand loyalty somecensumersareloyaltoa
•
-
brand -
whltnebytoswitehevenifpricesihcreate
percentage of
•
Elastic -
Dlthighertiotincemeistauenup
•
trehithight.otinomeistanenupmay.ba
intense •
Inelastic iltnotmuchotincemeistaaenup
-
necessity good : -
stiudemanded
Nature of Elastica> luxury good subjective Different different goods
•
-
consumers see
good
•
Inelastic → necessity good as necessities Eg Chocolate , cigarettes
-
.
Time / Inertia •
Inelastic →
Evenifconsumerunewgooasatecheaper
•
Brand loyalty
elsewhere imaybetoolatylnetenoughtoswitch •
Don't always have substitutes available
Elastica overtime , gain information and switch
, Evaluate the usefulness of PED
to }
Can maximise revenue
P
[ elastic
•
PEDvatueshewswheretotalrerehueismaximirea.at
A-
} unit elastic where PED -1
-
-1 -
,
unit elastic
If PED elastic → prices should be decreased from PztoA=
!
•
M
7) inelastic
- - -
- - - - "
would cause amore than proportionate ↑inQDtromQt0⑨
\
'
p] - - t - -
-
t -
-
t
If PED is Inelastic → prices should be increased from BtoB
-
• =
"
"
! ! i would laureates than proportionate tin an trematodes
Q2 Qi Qs Q
•
Firms are able to maximise revenue asaiesult
Investment
P A •
If PED is elastic -'
tirmswiuhaveanihcentivetebe dynamically
A 52
Pi -
-
; is
efficient tinvettintortbsothattheycanbenetittromtos -i↓LRAC=
Pz -
- - -
i
- -
-
-
p
"
i D Wthlbeabletodllreate prices from Pinhas it is more profitable to supply
"
i : more Qb would 4 mere than
proportionately
-
-
0° Qi Q2 Q
4) ↑
revenue from area ORAQI to 0P2BQ2
P 52
s,
•
Investing into RTD -4 quality of good -
manes demand more inelastic =
R - - -
- -
TB
means prices canbeincreatedfnmpitotk Qb would only ↓ less than
-_
i.
p,
- - - - - -
f- ya
I
proportionately
1
1 i ☐ 4) ↑ revenue from area OKAQI to OPzBQ2
0 Qz QI Q
Effectiveness ottaxes
•
Point of implementing ataris to reduce overconsumption otgoodsthathave negative externalities
leg cigarettes
4) If PED is inelastic )
tax-tprice-Qbwoulaohtyt.IE/sthanpropeAienately--
implementing .
→
"
significant impact reducing
won't have any in Mamet failure as hardcore smoker "mU
remain inthemarhlt
•
Government are signalled heute alternative terms of intervention sutras information provision
Incorrect Mamet failure
PED Responsiveness
:
of
quantity demanded toachangeinprice
=
-1.1in Qd
i. Ain P
Values
Elastic :PED > 1 Inelastic :PEDC1
PP=tQd more than AP -
-
told less than
T
-
q
- -
t
T
f
1-
. - -
i
proportionately ,
proportionately
I.
. . -
!
c-
Evaluate the determinants of PED
103 104
Determinants
Availability of •
Elastic -1> lftherearemanycletesubstitulesavaiable •
Depends onqualityot substitutes wiubereluctanttochange
-
Clotlsubstitutt tip :bQdmorethanpropasconsumerswiubuy cheaper substitutes itotlow quality -
consumers will payextratorhigher
•
Inelastic -1>
Hnotmanyclote substitutes are available quality than lower
tp-bQdlessthanprop.aslonsumershare.no other choice Depends upon brand loyalty somecensumersareloyaltoa
•
-
brand -
whltnebytoswitehevenifpricesihcreate
percentage of
•
Elastic -
Dlthighertiotincemeistauenup
•
trehithight.otinomeistanenupmay.ba
intense •
Inelastic iltnotmuchotincemeistaaenup
-
necessity good : -
stiudemanded
Nature of Elastica> luxury good subjective Different different goods
•
-
consumers see
good
•
Inelastic → necessity good as necessities Eg Chocolate , cigarettes
-
.
Time / Inertia •
Inelastic →
Evenifconsumerunewgooasatecheaper
•
Brand loyalty
elsewhere imaybetoolatylnetenoughtoswitch •
Don't always have substitutes available
Elastica overtime , gain information and switch
, Evaluate the usefulness of PED
to }
Can maximise revenue
P
[ elastic
•
PEDvatueshewswheretotalrerehueismaximirea.at
A-
} unit elastic where PED -1
-
-1 -
,
unit elastic
If PED elastic → prices should be decreased from PztoA=
!
•
M
7) inelastic
- - -
- - - - "
would cause amore than proportionate ↑inQDtromQt0⑨
\
'
p] - - t - -
-
t -
-
t
If PED is Inelastic → prices should be increased from BtoB
-
• =
"
"
! ! i would laureates than proportionate tin an trematodes
Q2 Qi Qs Q
•
Firms are able to maximise revenue asaiesult
Investment
P A •
If PED is elastic -'
tirmswiuhaveanihcentivetebe dynamically
A 52
Pi -
-
; is
efficient tinvettintortbsothattheycanbenetittromtos -i↓LRAC=
Pz -
- - -
i
- -
-
-
p
"
i D Wthlbeabletodllreate prices from Pinhas it is more profitable to supply
"
i : more Qb would 4 mere than
proportionately
-
-
0° Qi Q2 Q
4) ↑
revenue from area ORAQI to 0P2BQ2
P 52
s,
•
Investing into RTD -4 quality of good -
manes demand more inelastic =
R - - -
- -
TB
means prices canbeincreatedfnmpitotk Qb would only ↓ less than
-_
i.
p,
- - - - - -
f- ya
I
proportionately
1
1 i ☐ 4) ↑ revenue from area OKAQI to OPzBQ2
0 Qz QI Q
Effectiveness ottaxes
•
Point of implementing ataris to reduce overconsumption otgoodsthathave negative externalities
leg cigarettes
4) If PED is inelastic )
tax-tprice-Qbwoulaohtyt.IE/sthanpropeAienately--
implementing .
→
"
significant impact reducing
won't have any in Mamet failure as hardcore smoker "mU
remain inthemarhlt
•
Government are signalled heute alternative terms of intervention sutras information provision
Incorrect Mamet failure
