To what extent is Price elasticity of demand useful in a companies planning decisions?

To what extent is PED useful in a companies planning decisions?Price elasticity of demand is the responsiveness in demand to a change in price of a good. A firm can benefit from identifying a certain good’s elasticity because if they can recognise that a good is inelastic, as shown on the diagram to the right, the demand will not be majorly effected by the change in price. The price elasticity of demand depends on several factors. The

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most important factors are whether the product concerned is produced by a monopoly industry or by a competitive industry structure where there exist many substitutes. For example if say in a mobile telephone market there exist many companies competing and customers can switch to other companies with little switching costs then the demand for the product will be most probably elastic. However, if there is considerable switching costs then the demand will be inelastic. In contrast if say Railway Company provides services say in peak periods then with little competition from other railway companies and there exist little choices for such services the demand for rail services in peak periods will be inelastic. However, in off peak periods the demand for rail services becomes elastic because the customers can use other modes of transport if the prices are high and they have more choices in off peak periods. The other factor, which affects elasticity of demand, is whether it is a necessary product or luxury product. Necessary products are mostly inelastic compared to luxury products. However, the degree of elasticity differ for necessary depends on substitutes as well as for luxury products and whether the market structure is competitive, monopoly or imperfect competition or oligopoly market structure. The other factors affecting the elasticity of demand is the consumer buying habits. For example the demand for alcohol and Cigarettes tend to be inelastic than elastic. The other factor, which affects the price elasticity of demand, is the percentage of income spent on by consumers of a product.The PED is crucial for businesses because the price elasticity of demand has implications for setting prices of their goods and services as the price elasticity of demand has an impact on total revenue and yield management. For example a monopoly company is setting its prices for its services and say its peak period demand is inelastic and off peak period demand is elastic. They could then set higher prices in peak periods and set low prices in off peak periods.

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groat

28th of Feb 2012

Quality of writing

The essay is structured well, having a clear introduction and conclusion. Through doing this, they are able to define the key terms in the introduction. The conclusion is weak, as mentioned above, but it does make some attempt to answer the question. Spelling, punctuation and grammar are fine. This essay shows potential in its analysis, but is let down by not fully answering the question!

Level of analysis

The analysis in this essay is sound, but there are places where improvements could be made. The definition of price elasticity of demand was strong as it included the buzzword responsiveness. I liked how a diagram was included, yet there is no reference to the diagram in the essay. When talking about elasticities, it is not good enough to show one curve and a change of price and quantity. You must include two curves of different elasticities to indicate how a change in price will cause a different change in quantity for the two curves. Then, when talking about the diagram in the essay, you can gain easy marks by saying "A decrease in price from P to P1 has caused a bigger increase in quantity from Q1 to Q2 under D, rather than Q3 to Q4 under D1. This is because D has a more elastic price elasticity of demand." I liked how the essay explores the determinants of the elasticity, using phrases such as "it depends upon" to be more critical. Using such language shows that you are aware each market and product will be different, and elasticities vary greatly. Yes, the essay explores why a price elasticity of demand figure is useful to a firm, but it does not discuss the extent to which it is useful. If I was doing this essay, I would note that a price elasticity of demand is an estimate, based on data gathered months earlier. So, it is likely that external factors will have changed since then. Such evaluation will begin to answer the question.

Response to question

This essay engages well in respects to showing understanding and analytical skills, however it lacks any strong evaluation. When the question is asking "to what extent" you must evaluate and answer the question with a strong justified judgement. This essay analyses price elasticity of demand and its determinants well, but does not conclude strongly. It engages with the usefulness of the elasticity to a firm, yet it does not engage with the extent to which it is useful. You cannot gain top marks when disregarding this!

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