PED Revenue
PRICE ELASTICITY OF DEMAND (PED) & REVENUE
Price elasticity of demand (PED) is particularly important to businesses, because of its effect on their revenue (income).
Consider the following examples:
1) Mrs Robinson wants to increase her business’s revenue, but can’t decide whether she should increase or lower her prices.
She currently charges £1 per unit and sells 1,000 units. She knows that the PED for her product is (-) 0.4.
What will happen to sales, sales revenue and profit if she:
a) raises the price by 10%?
Original Total Revenue = £1 x 1,000 units =
New price =
New quantity demanded (sales) =
New Total Revenue =
Difference between original and new revenue =
b) lowers the price by 10%?
Original Total Revenue = £1 x 1,000 units =
New price =
New quantity demanded (sales) =
New Total Revenue =
Difference between original and new revenue =
So if PED is __________ a business should ________ its prices, if it wants to raise revenue. In this case, because production will be lower, costs are likely to be __________, profit will also ____________.
2) Mr Khan has heard about Mrs Robinson’s plans, and wants to increase his business’s revenue too. But should he increase or lower his prices?
He charges £10 per unit and sells 10,000 units. The PED for his product is (-) 2.
What will happen to sales, sales revenue and profit if he:
a) raises the price by 5%?
Original Total Revenue =
New price =
New quantity demanded (sales) =
New Total Revenue =
Difference between original and new revenue =
b) lowers the price by 5%?
Original Total Revenue =
New price =
New quantity demanded (sales) =
New Total Revenue =
Difference between original and new revenue =
So if PED is __________ a business should ________ its prices, if it wants to raise revenue. In this case, however, as production will also increase, costs are also likely to __________, so profit may not be any _________. We need to know more about costs and profit margin, before we can say
Price elasticity of demand (PED) is particularly important to businesses, because of its effect on their revenue (income).
Consider the following examples:
1) Mrs Robinson wants to increase her business’s revenue, but can’t decide whether she should increase or lower her prices.
She currently charges £1 per unit and sells 1,000 units. She knows that the PED for her product is (-) 0.4.
What will happen to sales, sales revenue and profit if she:
a) raises the price by 10%?
Original Total Revenue = £1 x 1,000 units =
New price =
New quantity demanded (sales) =
New Total Revenue =
Difference between original and new revenue =
b) lowers the price by 10%?
Original Total Revenue = £1 x 1,000 units =
New price =
New quantity demanded (sales) =
New Total Revenue =
Difference between original and new revenue =
So if PED is __________ a business should ________ its prices, if it wants to raise revenue. In this case, because production will be lower, costs are likely to be __________, profit will also ____________.
2) Mr Khan has heard about Mrs Robinson’s plans, and wants to increase his business’s revenue too. But should he increase or lower his prices?
He charges £10 per unit and sells 10,000 units. The PED for his product is (-) 2.
What will happen to sales, sales revenue and profit if he:
a) raises the price by 5%?
Original Total Revenue =
New price =
New quantity demanded (sales) =
New Total Revenue =
Difference between original and new revenue =
b) lowers the price by 5%?
Original Total Revenue =
New price =
New quantity demanded (sales) =
New Total Revenue =
Difference between original and new revenue =
So if PED is __________ a business should ________ its prices, if it wants to raise revenue. In this case, however, as production will also increase, costs are also likely to __________, so profit may not be any _________. We need to know more about costs and profit margin, before we can say