Question

Find a real world example depicting price elasticity of demand. Be sure to explain how the concept of price elasticity demand would impact the seller's revenues should the seller choose to raise the price of the product.

Answer 1

Real world example depicting price elasticity of demand-

Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change.

Example-

Tesco bread. Tesco bread will be highly price elastic because there are many better alternatives. If the price of Tesco bread rises, consumers will switch to alternatives, such as Kingsmill.

Impact on Seller's Reveue-

As this concept uses two variables ie. Price and Demand .

Revenue= price × units sold.

So when these two variables meet, they surely impact sellers revenue directly.

The table below gives an example of the relationships between prices; quantity demanded and total revenue. As price falls, the total revenue initially increases, in our example the maximum revenue occurs at a price of £12 per unit when 520 units are sold giving total revenue of £6240.

Price	Quantity	Total Revenue	Marginal Revenue
£ per unit	Units	£s	£s
20	200	4000
18	280	5040	13
16	360	5760	9
14	440	6160	5
12	520	6240	1
10	600	6000	-3
8	680	5440	-7
6	760	4560	-11

• Consider the elasticity of demand of a price change from £20 per unit to £18 per unit. The % change in demand is 40% following a 10% change in price – giving an elasticity of demand of -4 (i.e. highly elastic).

So supplier, while deciding prices of products, hould keep in mind marginal revenue and marginal cost concept. Because profit is max where

Marginal Revenue = Marginal Cost