PED and total spending on a product/revenue
Economics notes
PED and total spending on a product/revenue
Price elasticity of demand (PED) is related to total spending on a product or revenue. For elastic demand, a decrease in price leads to a proportionally larger increase in quantity demanded, resulting in an overall increase in total spending or revenue. In contrast, for inelastic demand, a decrease in price leads to a proportionally smaller increase in quantity demanded, resulting in a decrease in total spending or revenue. Understanding the relationship between PED and total spending helps businesses determine the pricing strategies that maximize revenue and profitability.
How does PED impact total spending on a product?
PED impacts total spending on a product by indicating how changes in price affect the quantity demanded. If the demand for a product is price elastic (PED > 1), a decrease in price will lead to a proportionally larger increase in quantity demanded, potentially resulting in increased total spending. Conversely, if the demand is price inelastic (PED < 1), a price decrease will result in a smaller increase in quantity demanded and may lead to a decrease in total spending.
How does PED affect a firm's revenue?
PED affects a firm's revenue by influencing the impact of price changes on quantity demanded. When demand is elastic, a decrease in price can lead to a proportionally larger increase in quantity demanded, potentially resulting in higher total revenue for the firm. Conversely, inelastic demand means that price changes have a smaller effect on quantity demanded, impacting revenue accordingly.
How do changes in PED impact total revenue?
Total revenue increases with price for inelastic demand and decreases for elastic demand.