PED and Revenue

Written by Matt
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Price elasticity of demand (PED) is one of the key concepts when it comes to evaluating the impact of a demand/supply shift. The price elasticity of demand tells us no just whether price or quantity increases or decreases but how much demand for a product changes when price changes. This has an impact on revenue.

PED is one of the first bits of maths you come across in A Level Economics but if you are not very good at maths, don't panic, it isn't too tricky. To calculate PED you first need to be able to calculate a percentage change. If your not sure how to do this then have a look here. Once you can do that it is easy. Simply divide percentage change in quantity demanded by percentage change in price. If the number is between 0 and -1 then it is price inelastic and if it is past -1 then it is elastic. The number will always be negative. 

If PED is very inelastic then when price increases a lot then demand will fall by only a very small amount. This means that the firm gets a lot more money from each customer and only loose a very small number, hence revenue (price x quantity) increases. The presentation below takes you through calculating revenue, the effect PED has on it and how to show this diagramatically

 
Read 4183 times Last modified on Thursday, 04 July 2013 17:48
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