Assessment task 1 1. SteamScot face a ‘basic economic problem’ what is this ‘problem’ and what is the opportunity cost of the replace and repair programme? The basic economic problem refers to a situation where human wants are unlimited while human resources are finite; it is the economic problem of scarcity of resources. At any one particular time, the resources of the earth are capable of producing a limited number of goods and services, however, human wants exceed limited production possibilities and this gives rise to what is known as the economic problem of scarcity. In the passage ,Steam Scot have a budget of £2.5 million and this can be spent on adding a new route are repairing and replacing existing railways; the choice …show more content…
Calculate, using total revenue, the price elasticity of demand when: a (i) price rises from £4 to £5 (ii) price falls from £4 to £3 I. Elasticity is a measure of the responsiveness of demand to changes in the price of a good or service. In the case of Steam Scot, when the price rises from 4 to 5, demand falls from 60,000 to 40,000 units. The original equilibrium market price of 4 pounds resulted in demand of 60,000 units and this generated revenue of 240,000 pounds. When the prices increased to 5 pounds the resulting demand is 40,000 units, and this generates total revenue of 200,000 pounds. When market price changes from 4 pounds to 5 pounds 40,000 pounds of revenue are lost in this indicates an elastic price elasticity of demand. II. When price falls from 4 pounds to 3 pounds the demand for travel increases to 80,000 units- At the original market price of 4 pounds the demand for travel was 60,000 units generating revenue of 240,000 pounds. When the price is reduced to 3 pounds the resulting demand is 80,000 units and this also generates income of 240,000 pounds. When market price changes and the resulting revenue remains the same it can be said that price elasticity of demand is unitary in
Price elasticity of demand is a Theory of the relationship between a change in the quantity demanded of a
The elasticity of demand measures the buyer’s reaction to price as its changing. “Economists measure the degree to which demand is price elastic or inelastic with the coefficient E d, defined as E d = percentage change in quantity demanded of product X/ percentage change in price of product X” (McConnell, C. 2011). Therefore, Ed=∆Qd/∆Pd. When elasticity of demand is measured less than one, demand is considered to be inelastic. The coefficient in an inelastic range is less than one. When this takes place the percentage change in price is more than the percentage change in quantity. It can be said that when inelastic demand is present that quantity becomes less effected by price changing.
Elastic demand or “elasticity means the extent to which the quantity demanded changes when there’s a change in the price of a good” (Thinkwell, 2013). A product is considered elastic when the change in price increases the percentage change in quantity demanded. When
Price elasticity that relates to demand is determined by many factors. Price elasticity is measured by the change in price and the response from consumer demand. The demand of a good or service will vary the price in the item. The most important factor to determine the price elasticity of demand is necessity. If a good is a necessity, the demand will seldom change and the price is able to be adjusted. The demand is the most important due to the freedom it provides for price adjustment and inventory control. With necessity comes an inelastic price. Other factors such as the
Using the simulation as a guide the price elasticity of demand is reviewed to determine the effects of pricing strategies. Demand can either decrease or increase based on price of a product or service (Colander, 2010). Consumers tend to buy products were there is a decrease in price (Colander, 2010).
Elasticity of demand is measured as the percentage change in quantity demand divided by the percentage change in price .
Based on the above description, forms of elasticity will affect business decisions and pricing strategies differently depending on the nature and type of products or services being offered. Business organizations whose product offerings have elastic and perfectly elastic price elasticities of demand should not attempt to raise prices of their products because it will cause the quantity demanded and consequently total revenues to drop drastically. Businesses can there use the price elasticities of demand to determine whether the proposed changes in their prices will raise or reduce their total revenue. The following expression may be useful in helping business organizations to determine the impacts of elasticities on their total revenues based on the suggested price changes.
h) The refurbishments in year 5 require the use of specialised equipment that will be borrowed from another division of the Company. This is not reflected in the profit and loss accounts but will cost the other division additional hire costs of £200,000 per project.
Elasticity of demand helps the sales manager in fixing the price of his product, deciding the sales, pricing policies and optimal price for their products. The evaluation of this measure is a useful tool for firms in making decisions about pricing and production which will determine the total
When price elasticity of demand is elastic, the coefficient will be greater than one. When a percent price change occurs quantity demanded responds strongly there will be a large change in quantities consumers purchase. There is price sensitive in this scenario. If price elasticity of demanded is inelastic the coefficient will be less than one. When a percent price change occurs quantity demanded does not respond strongly then there is a slight change in quantities consumers will purchase. There a weak price sensitive in this scenario. Lastly, if price elasticity of demanded is unit elastic the coefficient will be equal to one. Whenever there is a percent change in price there is an equally matched percent change in quantity demanded. This scenario is rare.
When the price of a good rises the quality demanded falls, if we think about how much does it falls. To figure out by how much it falls we must calculate the price elasticity of demand which is calculate by how responsive demand is to rise in price. Also, the price elasticity of supply measures the responsiveness of quantity supplied to a change in price.
Price elasticity of demand is given by the formula PED= ΔQD/ΔP.P/QD. Given a regression equation, ΔQD/ΔP is given by the coefficient of price, in this case – 100 (Negi, 2010). To obtain the value of QD, we replace the values of the independent variables into the regression equation as follows.
Explain the relationship between the price elasticity of demand and total revenue. What are the impacts of various forms of elasticities (elastic, inelastic, unit elastic, etc.) on business decisions and strategies to maximize profit? Explain using empirical examples.
Recall that the elasticity of demand, which measures the responsiveness of demand to price, is given by