Elasticity- Business Use and Limitations Flashcards
(23 cards)
What does PED help businesses decide?
How to set prices to maximize total revenue (TR).
What should a business do if demand is price elastic (PED > 1)?
Lower price to increase total revenue.
What should a business do if demand is price inelastic (PED < 1)?
Raise price to increase total revenue.
How does PED help with production planning?
Firms can prepare for demand changes by hiring staff, increasing stock, or boosting productivity.
What is one limitation of using PED?
PED is difficult to calculate and may vary over time.
Why is PES important for businesses?
It shows how easily a business can respond to price changes.
How can a business make supply more elastic?
By reducing production lag, increasing stock/spare capacity, or making FoPs more substitutable.
What is a limitation of PES?
Making supply elastic can be costly or not possible in the short run.
What does a positive XED mean?
The goods are substitutes.
What does a negative XED mean?
The goods are complements.
How can businesses use XED for complements?
Lower the price of one good to increase demand for the complementary good.
What is a limitation of XED?
Relationships between goods can change over time and are hard to measure precisely.
What is non-price competition?
Competing using factors other than price, like quality, branding, or customer service.
Why is non-price competition important for substitute goods?
It helps businesses compete without lowering prices, especially if they’re close substitutes.
How should businesses react if their competitor lowers prices and they cannot?
Be prepared for a drop in output by reducing employment, stock levels, or production.
How should businesses respond to a boom if they sell normal goods (positive YED)?
Consider raising prices or increasing output through employment, stock, or capacity.
How should businesses respond to a recession if they sell inferior goods (negative YED)?
Possibly raise prices and prepare to increase output, as demand may rise.
What is a major limitation of elasticity figures?
They are only estimates, based on past data or surveys that may not be fully reliable.
Why might elasticity estimates be inaccurate?
Consumer habits can change, and competitor behavior can influence outcomes unpredictably.
What key assumption does elasticity analysis rely on?
Ceteris paribus – assuming all other factors remain constant.
Why is the ceteris paribus assumption a limitation?
In reality, factors like income, substitutes, complements, and consumer preferences often change together, not in isolation.
Why can’t businesses expect the same outcome from the same price change repeatedly?
Because PED varies along the demand curve — elasticity is not constant.
What does it mean when PED values change along the demand curve?
A 10% price change may lead to a different % change in quantity demanded depending on where you are on the curve.
