PED

• Price elasticity of demand

  a measure of what might happen to the demand for a product / service if a firm decides to change the price
• Factors effecting PED

  -Price of competitors goods

  -availability of substitutes

  -Differentiation (trends, ethical,customer service brand image, quality- more differentiated more price inelastic)

  -addictivness/habit (price inelastic)

  -ability to switch to diff products (long term contract/ business makes it harder to switch products )

  -Nature of goods :necessity (price inelastic)demand less sensitive to changes in prices vs Luxury (price elastic) demand is sensitive to changes in prices

  -income- consumer income high --> lower ped = easier to raise prices
• Price Elastic

  -Customers are sensitive to a change in price

  -fall in demand is greater than the rise in price
• Price inelastic

  -Customers are insensitive to changes in price

  -Fall in demand is less than the rise in price
• Calculating PED


  Percentage change in quantity demanded/ Percentage change in price
• How to work out percentage change

  (new-original/original)x100
• Interpreting PED

  -PED greater than 1 (-1,4.75) price elastic

  -PED less than 1 (-0.4,) price inelastic
• Rearranging the formula 


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• Impact On revenue when price falls

  
  

  -Price elastic- decrease prices to increase revenue -(theres increase demand, more revenue but higher variable costs (more products have to be made) and lower operating/Gross profit ( profit decreases as more money used for production-variable costs-)

  
  

  -price inelastic- Increase prices to increase revenue -demand only goes down by a little, stays same. so more does not be produced (increase in operating profit)
• Implications on price 


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• Strategies to reduce PED

  -reduce number of substitutes available:

  1. increase differentitation
  2. reduce competitors--> predatory pricing,takeovers
• Problems forecasting PED

  -tastes preferences change

  -price elasticity changes over period of economic cycle

  -price elasticity changes over different price ranges