PED Revenue

Topics: Supply and demand, Revenue, Marketing Pages: 2 (328 words) Published: April 23, 2015
PRICE ELASTICITY OF DEMAND (PED) & REVENUE

Price elasticity of demand (PED) is particularly important to businesses, because of its effect on their revenue (income).

Consider the following examples:

1) Mrs Robinson wants to increase her business’s revenue, but can’t decide whether she should increase or lower her prices. She currently charges £1 per unit and sells 1,000 units. She knows that the PED for her product is (-) 0.4.

What will happen to sales, sales revenue and profit if she:
a) raises the price by 10%?

Original Total Revenue = £1 x 1,000 units =

New price =
New quantity demanded (sales) =
New Total Revenue =

Difference between original and new revenue =

b) lowers the price by 10%?
Original Total Revenue = £1 x 1,000 units =

New price =
New quantity demanded (sales) =
New Total Revenue =

Difference between original and new revenue =

So if PED is __________ a business should ________ its prices, if it wants to raise revenue. In this case, because production will be lower, costs are likely to be __________, profit will also ____________. 2) Mr Khan has heard about Mrs Robinson’s plans, and wants to increase his business’s revenue too. But should he increase or lower his prices? He charges £10 per unit and sells 10,000 units. The PED for his product is (-) 2.

What will happen to sales, sales revenue and profit if he:
a) raises the price by 5%?

Original Total Revenue =

New price =
New quantity demanded (sales) =
New Total Revenue =

Difference between original and new revenue =

b) lowers the price by 5%?
Original Total Revenue =

New price =
New quantity demanded (sales) =
New Total Revenue =

Difference between original and new revenue =

So if PED is __________ a business should ________ its prices, if it wants to raise revenue. In this case, however, as production will also increase, costs are also likely to __________, so profit may not be any _________. We need to know more...
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