Applications of price elasticity of demand
- Examine the role of PED for firms in making decisions regarding price changes and their effect on total revenue.
- Explain why the PED for many primary commodities is relatively low and the PED for manufactured products is relatively high. (we will address this when we do PES)
- Examine the significance of PED for government in relation to indirect taxes.
Today we will continue on from yesterday and also consider the objectives above.
- Examine the role of PED for firms in making decisions regarding price changes and their effect on total revenue
- Explain why it is important for firms to be aware of PED for the products they produce when they are considering changing prices
- Examine the significance of PED for government in relation to indirect taxes (we will look at this in far more detail in the next topic)
- Give two reasons why the government would place a tax on a good, such as cigarettes
- Would government collect more in tax revenue if demand was price elastic or price inelastic? Why?
- Would the allocation of resources to an industry, including labour, be more affected by an indirect tax if demand was price elastic or inelastic? Why?
Here is a case study with some questions to answer...
Also, below is a great 4 1/2 minute summary of PED... an excellent revision tool!