Price elasticity of demand

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  • Created by: Izzie
  • Created on: 28-02-18 15:44
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  • Price Elasticity of Demand (PED)
    • Price elasticity of demand measures the extent to which a change in price leads to a change in quantity demanded
    • Factors influencing price elasticity of demand
      • Number & closeness of substitutes
        • The more substitutes it has the more price elastic it will be
      • Luxury or necessity
        • luxuries = price elastic, necessity = price inelastic
      • Proportion of income spent on a good
      • Time scale
    • In a highly competitive market many rivals offer similar/standardised products & demand for any of them will be price elastic
      • Many businesses in this situation won't consider a price increase as sales & revenue would fall
    • Businesses are in a stronger position when demand for their product is price inelastic.
      • They can use market research to target specific groups of customers with product features that appeal
    • When there are few substitutes demand tends to be less price sensitive
    • If a brand has strong brand loyalty they can keep in touch with their markets closely giving them the info they need onto whether or not to raise prices
    • If demand is price elastic
      • Increasing price decreases revenue
      • Decreasing price increases revenue
    • If demand is price inelastic
      • Increasing price increases revenue
      • Decreasing price decreases revenue

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