Elasticity

Application / Strategy
Type Strategies Conditions Outcome
PED Pricing
Strategy
Elastic lowers P
Inelastic increases P
Increases sales revenue
YED Output
Strategy:
What to
produce
1 Identify goods normal
elastic: lu!ury goods
inelastic: necessities
O" in#erior
$$$$% Set output accordingly as Y
change
Recession: Dd #or in#erior gds &ill rise $$% increase
pdn o# lo& ends'no #rills pdts such as (udget airlines
Boom: Dd #or normal gds &ill rise esp lu! gds $$%
introduce high end goods such as iPhone ) $$% locate
shops at prime area as pple &ill shop more in such areas
*ED "eaction to
Price change:
unli+e PED, it
is a reaction
rather than an
initiati-e
.ollo& suit (y cutting price &hen
mar+et leader'ri-al lo&er price
Substitutes: Pdt'Ser-ice Differentiation $$% lowers ve
!ED
e/g/ Samsung phones has a (igger screen than iPhone/
0pply computers are more aesthetically pleasing as
compared to 1icroso#t computers/
"lose complements: #oint promotions or 2oint
discounts
e/g/ 0 #irm o##ering slimming pac+ages may organi3e a
2oint promotion &ith a (eauty salon or hairdresser/
$ac%ling assumptions for strategies &' application to t(e real world
4imitations Theory "eality
"eteris paribus
assumption
Basic drawbac% in terms o# real
&orld application o# elasticity
concepts
1eant to simplify economic analysis
assumes not(ing else c(anges e!cept
price, income, price o# related good
respecti-ely
Se-eral #actors such as the P o# a related
good and Y le-el o# the economy may (e
c(anging simultaneously
e/g/ PED inelastic, (ased on PED alone,
shld increase P
5ut i# at the same time, recession,
assuming normal gd, Dd #alls $$% P drops
Information
problem
0ssumes #irms ha-e perfect
information to ma+e rational (usiness
decisions
0ll in#ormation pertaining to
elasticities are a-aila(le to #irms
6ot possi(le to o(tain per#ect in#ormation
In#ormation may (e imperfect)
incomplete) unreliable) inaccurate
6o guarantee strategies &ill (e success#ul
Ignores t(e
supply side of
t(e mar%et
0ssumes supply can easily cope &ith
any change in demand
Should also ta+e price elasticity of
supply into consideration
Whether they can respond #ast to the
change in demand
Cutting prices to stimulate demand may
not success#ully raise sales and re-eune
i# supply cannot cope wit( t(e
increased demand*
Ignores cost
side of t(e
profits e+uation
Only use#ul in helping #irms increase
total revenue
6o cost cutting strategies or
producti-ity enhancing strategies
.ailed to ma!imise pro#its as these
concepts do no ta+e costs into
consideration
0im o# #irm is to ma,imise profit
7ence, #irms loo+ at bot( revenue and
costs in #orumlating strategies to (oost
pro#its
Pro#its8 total re-enue total costs