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 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?
- Examine the implications of XED for businesses if prices of substitutes or complements change.
- Use examples to explain how knowledge of cross-price elasticities of demand can help firms make decisions in the case of (a) substitutes; (b) complements
- Examine the implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products and an even higher YED for services.
- What is one likely explanation of the rapid growth of service sector industries such as health care and gym membership, compared with other industries in the primary and secondary sectors?
- Explain why the PED for many primary commodities is relatively low and the PED for manufactured products is relatively high.
- Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high.
- Using this information, explain why the prices of commodities fluctuate far more than manufactured goods
Here is a case study with some questions to answer...
This article Meet the credit crunch winners illustrates a good example of real life YED. And Will price discounting help restaurants survive the crunch? has example of all three concepts of demand elasticities.
The last task for the elasticity topic is a case study on the market for air travel:
Also, below is a great 4 1/2 minute summary of PED... an excellent revision tool!