Importance of P.E.D

• Consumers

  • Consumers can use their knowledge on P.E.D in adjusting their spending when price or income changes.

  e.g increase in price will lead to decrease in consumption or switching to subsitutes.
• Government (Taxation)

  • Goods with inelastic demand will be charged higher taxes beacuse consumers will still buy them since they cannot do without them.
  • Goods with elastic demand will be charged lower taxes since consumers will avoid heavily taxed goods.
  • However, the govt does not target goods that are essential for human survival eg. food and medicine
• Government (Pricing)

  • Basic goods (necesssities) will be charged at lower prices.
  • Luxury goods will be charged at higher prices.
• Firms (Price Discrimination)

  • Price discrimination refers to charging different prices for the same amt of a good to different consumers in different places.
  • This ensures that the firms get more profits.
  • Places with inelastic demand (high income consumers) will have higher prices.
  • Places with elastic demand (low income consumers) will have lower prices in order to encourage individuals to buy hence increasing revenue.
• Firms (Output Adjustments/Determination)

  • Determination of the number of workers needed to increase output and maximize profits.
• Firms (Price Adjustments)

  • Knowledge on P.E.D helps producers make the right decisions if they want to maximize sales revenue.

  e.g increase prices of inelastic goods and reduce prices of elastic goods. this increases sales hence more revenue.
• Trade Unions


  Trade unions use their knowledge on elasticity of demand to secure wage increment for employees especially where demand for labour is inelastic.