If you think about the calculation, because an increase in price would normally cause a decrease in quantity sold, PED is typically negative. It is measured as the percentage change in the quantity demanded divided by the percentage change in price.Ī percentage change of any quantity is calculated by dividing the change in the amount by the original amount. We will consider first the Price Elasticity of Demand (PED), which is a measure of the sensitivity of quantity demanded to a change in the price of a good or a service. Join our Economics tuition classes or view more resources.Elasticity is a very important concept in economics, and is a measure of the sensitivity of one variable to changes in another variable. YED will change for different consumers, it is not possible to measure the change in consumers’ income individually. The producers also do not have ability to change prices as and when they like to. PED only works at a given period of time because the demand of consumers change over time. Consumers will purchase less of these items when there is a rise in income.īut, there are limitations. This is usually items like cheap food, instant noodles, unhealthy snacks. This usually applies to items like food.Īt the same time, producers are likely to see a drop in the demand for inferior goods. Producers can increase production but the rise in demand is small. The demand for basic goods will also go up, but this rise in less than proportionate to the rise income. This is because the rise in demand is more than proportionate to the rise in income. The producers should quickly increase production of this item. When a country goes through economic growth, consumers incomes are increasing.Īccording to theory, there is a greater than proportionate rise in demand for luxury items, like branded bags and cars. It tells producers what to produce when there are given changes in consumers’ income. Consumers are likely to buy them if there are increase in prices. This is usually relevant to producers selling basic necessities like food and water, because these items are necessity. Hence the producer is likely to gain more revenue since more people are buying, even though the price is increase. This is because when there is a rise in price, the increase in quantity demanded is more than proportionate. If the demand of an item is price inelastic, firms should increase price to increase revenue. Consumers are likely to buy them if there are drop in prices. This is usually relevant to producers selling luxury goods like branded bags and clothes, because these items are non necessity. Hence the producer is likely to gain more revenue since more people are buying, even though the price is slightly lower. This is because when there is a drop in price, the increase in quantity demanded is more than proportionate. If the demand of an item is price elastic, firms should decrease price to increase revenue. PED can serve as a pricing policy, telling producer how to change prices to increase revenue. Income Elasticity of Demand (YED) refers to the degree of responsiveness of quantity demanded when there is a given change in the income of consumer. Price Elasticity of Demand (PED) refers to the degree of responsiveness of quantity demanded when there is a given change in the price of a product. Question: Explain the usefulness of PED and YED concepts to a producer in trying to maximize revenue.
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