MYTUTOR SUBJECT ANSWERS

973 views

What is price elasticity of demand, and how can it affect the decisions of retailers?

Price Elasticity of Demand refers to the extent to which demand for a product will change in response to a change in its price.

If PED is 'elastic' this means that any given change in price will result in a more than proportionate change in demand.

If PED is 'inelastic' this means that any given change in price will result in a less than proportionate change in demand.

For example, let's say a retailer changes the price of oranges, from £1 to £1.50. As a result, the demand for oranges over the next week falls from 1000 to 850.

We can calculate that the change in price has been 50% (50/100 x 100 = 50) and that change in demand, in response to this, has been (-)15% (150/1000 x 100 = 15). The percentage change in demand has thus been smaller than the percentage change in price, meaning we can describe the PED of oranges, in this case, as inelastic.

Indeed, we can work out the 'coefficient' for elasticity using the formula '% change in demand / % change in price'. So, demand has changed by 15%, and price by 50%: 15/50= 0.3. Any figure less than 1 represents an inelastic PED; a figure equal to 1 represents unit elasticity (changes in demand are equal to changes in price); a figure greater than 1 represents an elastic PED.

How, then, might the PED of a product affect the decisions of a retailer? Let's take the example of our oranges. We saw that oranges had an 'inelastic' PED, which meant an increase in price was met with a less than proportionate decrease in demand.

At £1 each, the retailer sold 1000 oranges, making £1000 in return.

At £1.50 each, the retailer sold 850 oranges, and this makes £1275 in return.

Therefore, we can say that if a product appears to have an inelastic PED, it makes sense to increase the price, as this will result in a greater return, and vice versa.

Adrian G. A Level Geography tutor, A Level English Literature tutor, ...

2 years ago

Answered by Adrian, an A Level Economics tutor with MyTutor


Still stuck? Get one-to-one help from a personally interviewed subject specialist

58 SUBJECT SPECIALISTS

PremiumWilliam A. A Level Law tutor, GCSE Law tutor, A Level Economics tutor...
£36 /hr

William A.

Degree: Law (Bachelors) - Cambridge alumni University

Subjects offered:Economics, Maths+ 3 more

Economics
Maths
Law
Chemistry
.LNAT.

“I recently graduated from the University of Cambridge in Law and completed my A Levels in 2012 with 4 A*s in Maths, Economics, Physics and Chemistry.I am a friendly and approachable person and have previously tutored A Level Econom...”

£36 /hr

Adam D.

Degree: Economics and Management (Bachelors) - Bristol University

Subjects offered:Economics, Maths

Economics
Maths

“I am a second year undergraduate student at the University of Bristol, studying Economics and Management. I achieved A* in Economics and Maths A-levels and an A* at maths GCSE so would be very happy to help any students who are studyi...”

£20 /hr

Ridhi T.

Degree: Philosophy and Economics (Bachelors) - LSE University

Subjects offered:Economics, Maths+ 1 more

Economics
Maths
English Literature

“Studying a BSc in Philosophy and Economics, I wish to cultivate my tutees into ambitious and independent learners.”

MyTutor guarantee

About the author

PremiumAdrian G. A Level Geography tutor, A Level English Literature tutor, ...

Adrian G.

Currently unavailable: for new students

Degree: PPS (Bachelors) - Cambridge alumni University

Subjects offered:Economics, Geography+ 2 more

Economics
Geography
English Literature
English Language
-Oxbridge Preparation-

“My Academic RecordI have just graduated from Cambridge University where received a 2.1 grade in Politics, Psychology and Sociology. At A-level I received 4A* grades in Geography, English Literature, Economics and DT.My Approach to ...”

You may also like...

Posts by Adrian

In 'Othello', how does Shakespeare suggest that Iago has built a reputation for being trustworthy?

What is price elasticity of demand, and how can it affect the decisions of retailers?

What is the impact of tropical air masses on the UK?

Other A Level Economics questions

Examine the desirability of a fixed exchange rate regime amongst the world's major economies.

What is the best method of structuring an Economics Essay

What is GDP and is it a useful indicator to measure the standard of living?

How do you calculate Price Elasticity of Demand

View A Level Economics tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok