Price Elasticity of Demand Explained | PED

Summary

This video explains the concept of Price Elasticity of Demand (PED), which measures how changes in price affect the demand for goods and services. It distinguishes between elastic products, where demand changes significantly with price adjustments, and inelastic products, where demand is less sensitive. The video walks through the formula for calculating PED and provides real-world examples, such as chocolate bars (elastic) and train tickets (inelastic). Understanding PED helps businesses make informed pricing decisions to optimize sales revenue, highlighting the importance of knowing whether a product’s demand is elastic or inelastic.

Takeaways

• 😀 The Price Elasticity of Demand (PED) measures how demand for a product or service changes in response to price changes.
• 😀 PED helps businesses understand whether their goods and services are price elastic or inelastic, guiding pricing decisions.
• 😀 Elastic products see a larger change in demand than in price when prices are adjusted, meaning demand is more sensitive to price changes.
• 😀 For elastic products, lowering prices can increase demand, and raising prices can lead to a decrease in demand, ultimately lowering total revenue.
• 😀 Examples of elastic products include chocolate bars and popular supermarket items like milk, bread, and vegetables.
• 😀 Inelastic products are less sensitive to price changes, meaning demand doesn’t change significantly when prices are increased or decreased.
• 😀 For inelastic products, raising prices typically increases total revenue, while reducing prices leads to lower revenue.
• 😀 Examples of inelastic products include train tickets for commuters, Apple products, and tickets for high-end sporting events.
• 😀 To calculate the price elasticity of demand, use the formula: percentage change in quantity demanded ÷ percentage change in price.
• 😀 A product is considered elastic if the elasticity number is greater than 1 (in absolute value) and inelastic if it is less than 1.
• 😀 In a worked example, if a business increases the price of a product and demand drops less than the price increase percentage, the product is inelastic and a price increase is beneficial.

Q & A

What is the Price Elasticity of Demand (PED)?

The Price Elasticity of Demand (PED) measures how the demand for a product or service changes in response to a change in its price. It helps businesses understand the relationship between price changes and demand fluctuations.

Why is it important for businesses to understand PED?

Understanding PED helps businesses make informed decisions about pricing strategies. By knowing whether their products are elastic or inelastic, they can predict how price changes will impact total revenue and adjust their pricing accordingly.

What does it mean if a product is considered elastic?

An elastic product is one where demand is highly sensitive to price changes. If the price increases, demand decreases by a larger percentage, and if the price decreases, demand increases by a larger percentage.

What happens to total revenue if the price of an elastic product increases?

If the price of an elastic product increases, total sales revenue decreases because the demand drops by a higher percentage than the price increase.

What is the effect of a price decrease on an elastic product?

When the price of an elastic product is decreased, demand increases by a larger percentage than the price decrease, resulting in an overall increase in total sales revenue.

What defines an inelastic product?

An inelastic product is one where demand is less sensitive to price changes. A price increase does not significantly reduce demand, and a price decrease results in a smaller increase in demand.

How does increasing the price of an inelastic product affect total revenue?

When the price of an inelastic product increases, total revenue increases because the reduction in demand is smaller than the price increase.

What is the impact of lowering the price of an inelastic product?

Lowering the price of an inelastic product results in a smaller increase in demand, which leads to a decrease in total sales revenue, as the percentage change in demand is smaller than the price decrease.

What is the formula to calculate the Price Elasticity of Demand?

The formula to calculate PED is: (Percentage change in quantity demanded) ÷ (Percentage change in price). This gives a numerical value that indicates how elastic or inelastic a product is.

How can businesses use the elasticity rating to make pricing decisions?

A business can use the elasticity rating to determine whether raising or lowering prices will benefit their total sales revenue. A rating below -1 indicates inelastic demand, while a rating above -1 indicates elastic demand. This helps businesses decide on optimal pricing strategies.