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Usefulness of Ped’s
Allows a firm to predict the change in revenue with the change in price.
Firms can charge different prices in different markets if elasticities differ in income groups.
Allows a firm to decide how much tax to pass on to a consumer.
Enables the government to predict the impact of taxation policies on products.
The effect of a change in price on the total revenue & expenditure on a product.
The effect of a change in an indirect tax on price and quantity demanded and also whether the business is able to pass on some or all of the tax onto the consumer.
Information on the PED can be used by a business as part of a policy of price discrimination. This is where a supplier decides to charge different prices for the same product to different segments of the market e.g. peak and off peak rail travel or prices charged by many of our domestic and international airlines.
Usually a business will charge a higher price to consumers whose demand for the product is price inelastic
The usefulness of Yed’s
Knowledge of income elasticity of demand helps firms predict the effect of an economic cycle on sales. Luxury products with high income elasticity see greater sales volatility over the business cycle than necessities where demand from consumers is less sensitive to changes in the cycle.
Income elasticity and the pattern of consumer demand
As we become better off, we can afford to increase our spending on different goods and services. The income elasticity of demand will also affect the pattern of demand over time.
• For normal luxury goods - income elasticity of demand exceeds +1, so as incomes rise, the proportion of a consumer’s income spent on that product will go up.
• For normal necessities (income elasticity of demand is positive but less than 1) and for inferior goods (where the…