Ped And Total Spending On A Product/Revenue
Economics notes
Ped And Total Spending On A Product/Revenue
Price Elasticity of Demand
➡️ Price Elasticity of Demand (PED) is a measure of how responsive the quantity demanded of a good or service is to a change in its price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price.
➡️ PED can be used to determine the total spending on a product or service. If the PED is elastic, then a decrease in price will lead to an increase in total spending. Conversely, if the PED is inelastic, then a decrease in price will lead to a decrease in total spending.
➡️ PED can also be used to determine the revenue generated by a product or service. If the PED is elastic, then an increase in price will lead to an increase in revenue. Conversely, if the PED is inelastic, then an increase in price will lead to a decrease in revenue.
How does the price elasticity of demand (PED) affect total spending on a product?
The PED measures the responsiveness of demand for a product to changes in its price. If the PED is elastic (greater than 1), a small increase in price will lead to a large decrease in quantity demanded, resulting in a decrease in total spending on the product. Conversely, if the PED is inelastic (less than 1), a small increase in price will lead to a small decrease in quantity demanded, resulting in an increase in total spending on the product.
Can a decrease in price lead to a decrease in total revenue for a product?
Yes, it is possible for a decrease in price to lead to a decrease in total revenue for a product if the PED is inelastic. In this case, the increase in quantity demanded due to the lower price may not be enough to offset the decrease in price, resulting in a decrease in total revenue.
How can a firm use knowledge of PED to maximize revenue?
A firm can use knowledge of PED to set the optimal price for its product. If the PED is elastic, the firm can increase revenue by lowering the price, while if the PED is inelastic, the firm can increase revenue by raising the price. Additionally, a firm can use price discrimination strategies to capture different segments of the market with different PEDs, such as offering discounts to price-sensitive customers while charging higher prices to those with a more inelastic demand.