P.e.d (Price elasticity of demand) is divined as the responsiveness of the quantity demanded of a good to changes in its own price. It is calculated by the equation :-
P.e.d = % change in quantity demanded
% change in price
As I have found information figures when the Plastation1 went on sale and more recent figures, I have worked out the P.e.d for the Sony Plastation1.
P.e.d = 0.91
The result shows the Sony Playstation1 is inelastic. This means the consumers are aware of changes in the price and reflect on them to whether or not they buy the product. Because of the quite neutral result of P.e.d it shows a balance between a large loss of sales or large gain.
Uses of Price Elasticity of Demand
- Its used to determine the pricing policy – if demand is price inelastic, firms will increase price to raise revenue; if demand is price elastic firms will decrease price.
- Firms can use it for planning e.g. by estimating the effect of a price change, firms can plan the number of goods to produce, the number of people to employ and impact on cash flow.
- It can be used when price discriminating to set price in each market.
- Can be used by the government to estimate the impact on an indirect tax increase in terms of scales and tax revenue.
- Can be used to estimate the impact a consumer spending, producer’s revenue and income of any shift in supply.
The next part is to look for the Y.e.d (income elasticity for demand). This is defined as the responsiveness of the quantity demanded of a good to a change in the real income of consumers. It is calculated by a similar equation :-
Y.e.d = % change in quantity demanded
% change in real income
Again to work out the equation we need information figures of the local area. For Y.e.d we need income figures, which I have found out, therefore
Y.e.d = 1.9
The result is a positive coefficient, this means consumers have more income so they can spend more on that product.
Uses of income elasticity of demand
- Can determine what goods to produce or stock, e.g. as the economy grows, firms might want to avoid inferior goods.
- It can help firms plan production and employee requirements as the economy.
- It can help firms estimate any potential changes in demand, e.g. as overseas incomes grow it may create new markets.
The final part of my investigation is X.p.e.d (Cross elasticity of demand). This is defined as the responsiveness of the quantity demanded to changes in the price of other goods. The equation is as follows :-
X.p.e.d = % change in quantity demanded of a good A
% change in price of good B
I could not find any figures on a product that rivaled the Playstation1, therefore I could not work out the X.p.e.d. A product that rivaled the Playstation1 probally the most was the Nintendo 64, which to my knowledge came out in 1997 (two years later than the Playstation1).
The coefficient may be positive or negative. Goods in competitive demand will have positive cross elasticities. For example, an increase in the price of coffee will increase the demand for tea. This, I would not expect to be true for the consoles we are talking about. Goods in joint demand however will have negative cross elasticities. For instance, an increase in the price of record players will reduce the demand for records. This I would expect to be true for the Playstation1 and Nintendo 64. The coefficient will be high for goods that are very close substitutes or complements and low when they are neither substitutes nor complements.
Uses of cross elasticity of demand
- Firms can estimate the effect on their demand of a competitors price cut.
- Firms can estimate impact on demand for their product if they cut the price of a complement e.g. if they cut the price of the computer, how much will demand for software increase?
