Price Elasticity of Demand Essay

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Autumn Assignment- Demand and Price Elasticity of Demand Part A Price elasticity of demand is a measure of the sensitivity of demand for a product to changes in its price. (Evan Davis et.al. 2003) An elastic demand means that the quantity demanded is responsive to changes in price; inelastic meaning that the quantity demanded is unresponsive to changes in price. PED can be measured by dividing the percentage change in quantity demanded by the percentage change in price. There are a number of factors effecting price elasticity of demand, the overriding determinant being the availability of substitute goods to the consumer, the more that are made available, the higher the elasticity is likely to be as buyers can easily switch from one product to another. Necessity of the good or product is another factor, the more necessary the product is to the consumer the lower elasticity as they will attempt to purchase no matter how much the price fluctuates. Brand loyalty, consumer income, along with peak and off peak pricing are also contributory factors of PED. The price elasticity of demand tells us what happens to total revenue when price changes. When demand is inelastic, a rise in price leads to a rise in total revenue and when demand is elastic total revenue rises when price falls. Total revenue= price x quantity demanded. As inferred from the text, the merchants have suggested that a drop in price for Bordeaux wine could increase sales. In order to retain current demand levels they must decrease their pricing strategy to reflect the ‘financial thunderstorms’ of the current economic climate. When the demand for a product does not increase or decrease correspondingly with the fall or rise in its price, the notion of inelastic demand is supported, which is the case for Bordeaux. The PED for Bordeaux is low, as a change in price will have very little influence on
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