3 Price elasticity of demand (PED) When a business proposes to change the price of a product or service the key question is: ‘to what degree will demand be affected?’
3.1 Calculation
The price elasticity of demand can be calculated as follows:
Illustration 4 – Price elasticity of demand
§ The price of a chocolate bar goes up from 40p t0 60p.
§ Sales of a retailer fall from 20 per day to 12 per day.
%change in price = (20/40) =50%
%change in demand = (-8/20) = -40%
PED = -40/+50 = -0.8
(a) If the % change in demand > the % change in price, then price elasticity > 1.
Demand is ‘elastic’ i.e. very responsive.
§ Total revenue increases when price is reduced.外语学习网
§ Total revenue decreases when price is increased.
(b) If the % change in demand < the % change in price, then price elasticity < 1.
Demand is ‘inelastic’, i.e. not very responsive.
Total revenue remains the same:
§ When price is reduced - the price reduction is offset by increased demand.
§ When price is increased - the price increase is offset by reduced demand.
Test your understanding 2
§ A retailer plans to increase the price of a text book from $20 to $22.
Given that the PED = -1.25, what will be the impact of the price rise on sales (currently 300 per annum) and revenue? |
发表于 2012-2-23 17:09:42
