The Significance of PED | Economics for GCSE/IGCSE - Year 11 PDF Download

PED & Total Revenue

• Revenue is the amount of money a firm receives from selling its goods/services. Total revenue is calculated as price multiplied by quantity sold.
• Firms should increase the price of products with inelastic demand to maximize revenue and decrease prices for products with elastic demand as per the total revenue rule.

This can be illustrated using a demand curve:

Diagram Analysis:

• The market for this good/service exhibits high elasticity in its demand curve.
• When a good/service experiences price elasticity in demand, the increase in quantity demanded in response to a price decrease is greater than proportionate.
• Lowering the price results in increased total revenue:
  

Diagram Analysis:

• The demand curve is very inelastic in this market.
• When a good or service has price inelastic demand, the quantity demanded decreases less than proportionally to an increase in price.
• Total revenue rises when prices are increased.

The Implications of Price Elasticity of Demand (PED) for Stakeholders

• Knowledge of PED holds significance for companies aiming to optimize their revenue:
  • If a product exhibits price inelastic demand, businesses are advised to increase prices.
  • Conversely, if demand is price elastic, lowering prices is recommended.
  • Companies have the option of utilizing price discrimination strategies, such as setting lower prices for specific segments and higher prices for others.
• Understanding PED is crucial for Governments concerning taxation and subsidies:
  • By taxing products with price inelastic demand, governments can boost tax revenue without significantly harming businesses, as consumers are less responsive to price fluctuations, leading firms to pass on the tax burden to consumers.
  • If governments provide subsidies for products with price elastic demand, there can be a more than proportional surge in demand for those products.