• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Discuss the usefulness to a business of a knowledge of price elasticity of demand and income elasticity of demand. [12]

Extracts from this document...


Transfer-Encoding: chunked ´╗┐Discuss the usefulness to a business of a knowledge of price elasticity of demand and income elasticity of demand. [12] [PED YED already defied, in part a), no marks were awarded for knowledge on this essay] With regards to price elasticity of demand, the firm can derive much utility from knowledge of its values. Most importantly, it allows the company to make a well-informed decision in regards to pricing strategies in order to allow for a maximisation of revenue and profits. A high price elasticity of demand could indicate that there is potential for increasing revenue of the price is lowered, as, a high price elasticity of demand indicates a very strong consumer reaction to price changes, thus, if the price is lowered, the company can expect an increase in consumption that will outweigh the fall in per unit revenue. ...read more.


In terms of income elasticity, knowledge of its value can help the firm make better decisions in terms of production with regards to the economic cycle. If the income elasticity of demand happens to be relatively low and close to 0, then that indicates a very small correlation between incomes and consumption, meaning that the economic cycle is likely to have little to no effect on revenue. However, if the income elasticity of demand happens to be a particularly high value, be it positive or negative, then the firm should pay close attention to its output in relation to the economic cycle. If the product in question has a very high negative value, that would indicate it is an inferior good, whose demand increases with falls in income, thus the firm should aim to produce such a good during times of recession, where incomes are predicted to fall. ...read more.


This comes at an opportunity cost to the company and it could be argued that company funds would be better spend on other endeavours such developing new products or funding growth. Moreover, the use of such statistics can slow down the decision-making process within the business, thus limiting its ability to react to changes in the market and, as such, lowering its price elasticity of supply, which can hurt the firm?s ability to maximise revenue if the price of the product they are producing increases. Overall, while the knowledge of price and income elasticities can be invaluable to a firm as it helps the firm make better decisions in regards to pricing and the level and nature of their output, this is as long as the figures used are accurate, up-to-date and used in conjunction with other metrics by competent managers in order to be suitably and promptly interpreted and lead to a decision. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. Peer reviewed

    Income and Price Elasticity of Demand

    3 star(s)

    Usefulness Using the IED formula a business can work out the change in quantity demand if the income level changes.

  2. what is economics

    * In the longer term, however, supply will normally be more price elastic o An example is travel companies - they have to reserve flights up to a year in advance for some consumers - making supply price inelastic o The problem companies then face is if demand is low,

  1. Discuss whether or not a firms revenue would increase, in response to price and ...

    The opposite is also likely to be true for an increase in price. As such, the rate at which revenue falls with an increase of the price is likely to increase as well together with the price. This is due to the fact that as price increases the purchase becomes

  2. Discuss whether the elasticity of supply of manufactured goods is likely to be greater ...

    However, while all of these factors apply in a general sense, there are many exceptions for manufactured goods where their elasticity of supply can be very inelastic. One such exception can be items that are handmade by highly skilled workers.

  1. Price Elasticity and Income Elasticity of Demand

    Since primary commodities are a necessity, demand tends not to change that much if price changes ? rendering it inelastic.

  2. Measuring National Income

    it would have cost a certain amount of money but if you were to do it yourself, the same work or output was done but yet it is not taken into account by GDP figures. One of the ways of measuring national income is the output method.

  1. Economy and how it affects my business selling tables

    then I will expand on this by giving examples to further this question. Contractionary monetary policies are the monetary policies that attempt to bring down the money supply to avert inflation. This makes money and credit less available, so the ability to lend money decreases while interest rates increases for

  2. Briefly discuss the factors that determine the size of elasticity of demand?

    spent on a commodity, its demand will be more or highly elastic such as demand for luxuries. Another factor is the amount of time available. Longer is the time period more elastic is the demand. In the short period if price of a commodity like petrol is increased, its demand

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work