Market Analysis Flashcards
Price Elasticity Of Demand
Price Elasticity of demand- Measures the sensitivity of demand to a
change in price. Price elasticity is always negative as the
increase in price will lead to a fall in sales and, conversely, a
reduction in price will lead to a rise in sales
Formula For PED
%percentage change in quanity demanded/ % change in price
price elasticity of demand and sales revenue
Price Elasticity and Sales Revenue-PED is important when deciding on a pricing strategy.
This is because the price of a product affects sales
revenue.
* If demand is price elastic, then putting up the price will
lead to a fall in sales revenue. The increase in price will
be more than offset by a decrease in sales. Conversely,
lowering price when demand is price elastic will lead to
a rise in sales revenue. The fall in price will be more than
offset by an increase in sales.
* If demand is price inelastic, a rise in price will lead to a
rise in sales revenue. A fall in price will lead to a fall in
sales revenue.
* Changing the price can therefore affect sales revenue.
But the exact effect, and whether it leads to an increase
or decrease, depends on the price elasticity.
Price Elastic
Price Elastic
* Number is greater than 1.
* This means that a change in price will cause a more
than proportional change in the quantity demanded.
The level of demand is sensitive to a change in price.
* If the price goes up, the demand falls dramatically.
* If the price goes down, the demand rises dramatically
Price Inelastic
Price Inelastic
* Number is less than 1.
* If a good has inelastic price elasticity of demand, then a
change in price causes a less than proportional change
in the quantity demanded.
* If the price goes up, the demand falls just a little.
* If the price goes down, the demand increases just a
little
income elasticity of demand
Measures how sensitive demand is to a change
in income
Formula For YED
%percentage change in quantity in demand/ Percentage change in income
income elasticity of demand can be grouped into three
categories:
income elasticity of demand can be grouped into three
categories:
* Normal goods - as real incomes increase, the demand
for normal goods will also increase positive income
elasticity that is less than 1. Examples are matches,
lemonade, newspapers.
* Luxury goods - the demand for luxury goods will
grow at a faster rate than the increase in real income
that created the change in demand: positive income
elasticity that is greater than 1. Examples are holidays
abroad, health club membership, sports cars.
* Inferior goods - these are cheap substitutes of products
people prefer to buy when their income is reduced
(such as value line baked beans): negative income
elasticity
Interpreting the Results of YED
ELASTIC - number is greater than 1 (positive and high) -
this means that a change in income causes a more than
proportional change in the quantity demanded. This result
usually applies to luxury goods or services. For example, if
consumer incomes decrease then this might result in a fall
in cruise holidays or designer handbags.
INELASTIC - number is between 0 and 1 (positive and low)
- this means that a change in income causes a less than
proportional change in the quantity demanded. This result
usually applies to normal goods or services. For example,
if consumer income increases then this might encourage
people to eat more fresh fruits and vegetables, thereby
increasing the demand for these goods.
NEGATIVE - number is less than 0 (negative) - this means
that if income rises then demand falls, and vice versa. If
income falls then demand rises. This usually applies to
inferior goods or services, where superior goods and
services are available when a consumer has the money
to purchase them. Examples of this includes supermarket
own brand products, such as Tesco Value Baked Beans. If
consumer income increases, then people may be able to
afford Heinz Baked Beans instead. The opposite is that if
consumer incomes fall, people might try to cut back on
their expenditure and buy cheaper alternatives for the
same type of good or service
The impact on revenue for
changes in income (YED)
The impact on revenue for
changes in income (YED)
* Knowing the YED of a product helps a business respond
to changing economic situations and allow them to
plan.
* If a business knows the income elasticity of demand for
its product(s) it can use this information to help develop
its strategy and its product portfolio.
* Many UK businesses are likely to focus on normal and
luxury products as in general terms the economy tends
to grow, and incomes tend to go up. However, in times
of recession, where incomes may go down, inferior
goods could be profitable for businesses as consumers
may cut back on spending and look for cheaper and
lower quality products
The Impact on Revenue for
Changes in Price (PED)
The Impact on Revenue for
Changes in Price (PED)
Businesses use PED and YED to calculate how much
demand will change if there is a change in price or income.
The resulting change in demand can lead to a change
in revenue. This could have an impact on their levels of
success and meeting targets.
ELASTIC DEMAND - If price falls, then businesses see a
greater increase in the quantity demanded. Even though
the revenue from each product sold has fallen. As the
amount sold has increased more than the decrease
in price, businesses will achieve higher total revenue
levels. Businesses can use this information to influence
lower pricing strategies. If prices were to decrease, they
would see an increase in revenue through more than
proportionate sales. However, if price increases, then
quantity demanded will fall more than proportionately,
which leads to a fall in revenue.
INELASTIC DEMAND - If price falls, then businesses see a
less than proportionate increase in the quantity demanded.
Even though sales have increased, the fall in revenue from
each item sold is greater than the increase in quantity sold,
leading to a fall in total revenue
