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Price Elasticity of demand


Question 1

Work out the PED for each, and comment on your result.

  1. The price of DVDs today is £200, and the quantity demanded is 4m. Next year the price falls to £180 and the quantity demanded rises to 6m.
  2. The price of Pens today is £1, and the quantity demanded is 1m. Next year the price rises to £1.10 and the quantity demanded falls to 950,000.
  3. The price of The Times today is 40p, and the quantity demanded is 2m. Next year the price falls to 30p and the quantity demanded rises to 2.2m

Question 2

RCO Ltd is a UK based electronics manufacturer and retailer. Its main products are Netbook computers, PCs and Electronic Calculators.  The current price of the Netbook is £500, the PC is £800 and the calculator is £40. This year the firm sold 10,000 Netbooks, 20,000 PCs and 1 million calculators.

In an attempt to improve revenue the managers of the firm have decided to increase all prices by 10%. Market research has suggested that the price elasticity of demand for each product is:

Netbook: (-) 1.5; PC : (-) 2.5; Calculator:  (-) 0.6

You have been asked to evaluate the planned price increases.

  1. Comment on the planned price changes.

  2. Would a 10% price reduction have been better for some or all of the products?

  3. What benefit (if any) would advertising bring to the firm?

(You should support any arguments with calculations.)

Question 3

A local firm produces three types of Pizza, for delivery to homes in the area. The owners have completed research, to discover the demand curves for each of the three pizzas. The schedules are shown below: (Quantities are per week).

Price Pizza A (Qd) Pizza B (Qd) Pizza C (Qd)
12 800 0 100
11 840 0 200
10 880 400 300
9 920 800 400
8 960 1200 500
7 1000 1600 600
6 1040 2000 700
5 1080 2400 800

Plot the three demand curves, on one graph.

  1. Calculate PED for all three pizzas over the price range £9 to £10.

  2. For Pizza C only, what price must be charged if the firm wishes to maximize its sales revenue?