The Importance For Price Elasticity of Demand
The Importance For Price Elasticity of Demand
Jack Clark 12SU
The Price Elasticity of Demand for goods indirectly dictates the function of today’s economy, it does this by using the wants and needs of the consumer and in-turn governs the prices for individual goods. Below, scenarios in which government or firm have to look at the PED are presented and how they react to create the best possible outcome they can achieve.
Firms need to consider the elasticity of demand and, using this, determine the prices of a good; this is seen as a policy in firm’s cases. The firm needs to consider whether lowering the price will stimulate demand for the product, if so to what extent and whether the firm’s profits will also increase as a result. This can take either one of two outcomes: One, if the increase in sales is more than the reduction in price in proportion, the firm’s total revenue will increase and profits may be higher. Or two, if the increase in demand for the good is less than the fall in price in proportion then revenue will decrease and profits would most certainly decrease. In this scenario, the knowledge of PED as it can move the firm towards increasing the price of an inelastic good, which shifts the burden of any additional cost of production onto the consumers, or decreasing the price of an elastic good to increase demand, and if this is done to the right degree of accuracy, can increase a firm’s revenue greatly.
The burden of tax can also be shifted by the firm onto the consumer to compensate for maybe an increased cost of producing a good. The knowledge of PED here is so important to the firm as if their good can be seen as a highly inelastic good, they can impose large taxation because they know that people need the good irrespective of price, maybe due to addiction. This extra increase in price just makes the cost of producing the good so much cheaper for the firm, therefore revenue and profits will increase greatly. This is also apparent in the
Jack Clark 12SU
The Price Elasticity of Demand for goods indirectly dictates the function of today’s economy, it does this by using the wants and needs of the consumer and in-turn governs the prices for individual goods. Below, scenarios in which government or firm have to look at the PED are presented and how they react to create the best possible outcome they can achieve.
Firms need to consider the elasticity of demand and, using this, determine the prices of a good; this is seen as a policy in firm’s cases. The firm needs to consider whether lowering the price will stimulate demand for the product, if so to what extent and whether the firm’s profits will also increase as a result. This can take either one of two outcomes: One, if the increase in sales is more than the reduction in price in proportion, the firm’s total revenue will increase and profits may be higher. Or two, if the increase in demand for the good is less than the fall in price in proportion then revenue will decrease and profits would most certainly decrease. In this scenario, the knowledge of PED as it can move the firm towards increasing the price of an inelastic good, which shifts the burden of any additional cost of production onto the consumers, or decreasing the price of an elastic good to increase demand, and if this is done to the right degree of accuracy, can increase a firm’s revenue greatly.
The burden of tax can also be shifted by the firm onto the consumer to compensate for maybe an increased cost of producing a good. The knowledge of PED here is so important to the firm as if their good can be seen as a highly inelastic good, they can impose large taxation because they know that people need the good irrespective of price, maybe due to addiction. This extra increase in price just makes the cost of producing the good so much cheaper for the firm, therefore revenue and profits will increase greatly. This is also apparent in the