PED

how does knowing the PED help?

-helps producers decide their pricing strategies -price discrimination -deciding which products to put sales tax on -determining taxation policies

what's the relationship between price elasticity of demand and total revenue?

If an increase in price causes a decrease in total revenue, then demand can be said to be elastic, since the increase in price has a large impact on quantity demanded

what is the PED for a product is equal to infinity?

Perfectly price elastic -meaning that a change in the price leads to zero quantity demanded

what is the PED for a product is equal to 0?

Perfectly price inelastic -meaning there is no impact on the quantity demanded from a change in price (suggesting absolutely no substitutes)

Determinants of PED

Substitutes- if they have subsides and you raise the price over the equilibrium no one will buy the product Income- large income, less repulsiveness because they have more disposable income Necessity- bigger than the necessity, less responsive people will be to change Habits- the more trendy, the more likely to keep paying Advertising- more loyal & effective ads, the more you are willing to pay Time- people need time to change their habits Durability- if perish goods go up, you will stay pay for it The cost of switching- the cost of switching banks for example the breadth of definition of the product- things that have no substitutes

what is the PED for a product is qual to 1?

Unitary price elastic -the percentage change in the quantity demanded is proportional to the change in price

sales revenue

amount of money received by a supplier from the sale of a good or service

many governments around the world regularly raise the taxes on tobacco, alcohol and petrol. Why?

because people will still buy the products because tabacco is used in addictive goods like cigarets which are demerit goods. Since people are addicted to them they consumers are still willing to buy them even if they are more expensive. This means they are price inelastic good because the demand for the product doesn't change. The government knows this so in order to make more money they van change more. This goes for alcohol as well. people are addicted to it and they use this to their advantage. Petrol is also a commonly used goof and it is necessary for cars because there are no substitutes for it, it is also a scarce resource. So it is an inelastic good meaning the demand for it won't change following a change in price and the government can put a higher tax on it leading them to make more money.

price elastic

if the price change is very large it is price elastic

PED

it measures the degree of responsiveness of the quantity demanded of a product following a change in its price

what happens if the PED is more than 1?

price elastic

what happens if the PED is less than 1?

price inelastic

sales revenue =

price x quantity demanded

profit=

sales revenue - expenses

if a cinema increases its average ticket price from $10 to $11 and this leads to demand falling from 3500 to 3325 customers per week, then the PED for the cinema ticket is calculated as:

% change in QD- 3325-3500/ 3500x100 = -5% % change for $- 11-10/ 10x100 =+10% -5/10 =0.5 (inelastic) DON'T WRITE MINUS

PED formula

% change in quantity demanded / % change in price