4.3 applications of PED

• inelastic demand means prices rise more than enough to offset the drop in supply, leading to higher revenues
• Inelastic demand for staples like coffee, milk, and wheat means a bad harvest (lower supply) leads to increased prices, benefiting farmers with higher revenues.
• • Elastic demand for air travel means that lower prices result in higher total revenue, a core element of EasyJet's business model.
• Price elasticity of demand (PED) and revenue are closely connected because PED measures how sensitive the quantity demanded of a good is to changes in its price, and total revenue depends on both price and quantity sold.
• When Demand is Elastic (PED > 1):

  • Definition: Demand is considered elastic if a small change in price causes a larger percentage change in quantity demanded.
  • Effect on Revenue:
  • If the price decreases, the quantity demanded increases significantly, and total revenue rises.
  • If the price increases, the quantity demanded drops sharply, and total revenue falls.
  • Why: The increase in quantity sold due to a price decrease more than compensates for the lower price per unit, leading to higher revenue. Conversely, when price rises, the sharp drop in quantity sold leads to a loss in revenue.
• When Demand is Inelastic (PED < 1):

  • Definition: Demand is inelastic if a change in price leads to a smaller percentage change in quantity demanded.
  • Effect on Revenue:
  • If the price increases, the quantity demanded decreases only slightly, so total revenue rises.
  • If the price decreases, the quantity demanded increases slightly, but total revenue falls.
  • Why: Since consumers are not very responsive to price changes, raising the price increases revenue because the decrease in quantity demanded is not large enough to offset the higher price.
• When Demand is Unit Elastic (PED = 1):

  • Definition: Demand is unit elastic if the percentage change in quantity demanded is exactly equal to the percentage change in price.
  • Effect on Revenue:
  • Changes in price do not affect total revenue because the increase in price is perfectly offset by the decrease in quantity demanded (and vice versa).
  • Why: The proportional changes in price and quantity leave total revenue unchanged.
• • Elastic demand: Lower price → higher revenue | Higher price → lower revenue.
  • Inelastic demand: Lower price → lower revenue | Higher price → higher revenue.
  • Unit elastic demand: Price changes have no effect on revenue.