Importance of Price Elasticity of Demand (PED) for Decision Makers
Importance of Price Elasticity of Demand (PED) for Decision Makers
Knowing about PED helps businesses, consumers, and the government make better decisions about prices and demand.
For Producers (Businesses)
If demand is price inelastic (people keep buying even if price rises), the firm can increase prices to earn more revenue. Example: Medicine or petrol.
If demand is price elastic (people stop buying when price rises), the firm should avoid raising prices because sales will fall a lot. Example: Soft drinks or snacks.
1. Predicting the Effect of Exchange Rates
When a country’s currency value falls, exports become cheaper for foreign buyers.
If exports are price elastic, foreign demand will increase a lot, helping producers sell more and earn more money.
2. Price Discrimination
This means charging different prices to different people for the same product.
Firms do this because different groups have different PED (different reactions to price).Example: Theme parks charge adults more and children less, or give discounts to families.
3. Deciding Which Products to Tax
Governments prefer to tax goods with inelastic demand because people will still buy them even if prices go up.
This helps the government earn more tax money without reducing sales much. Example: Alcohol, petrol, and cigarettes.
4. Making Taxation Policies
The government uses PED to plan taxes.
For goods that are harmful (like cigarettes or petrol), which have inelastic demand, governments add high taxes to reduce their use and collect revenue.