Economics Assignment - Hiba Begawala (11B)
The measure of sensitivity in reaction of quantity demanded and price of a good
P.E.D simply refers to Price Elasticity of Demand. The calculation is performed
following this approach:

Now, First type of elasticity referred as PED is known as Price Elasticity of
Demand which measures anything within excess of 1 value.
If the figure is found to be bigger than one, this would imply that the demand is
sensitive to price changes hence customers can alter their cast in few instances.
If the rest value is lower, on the other hand consumers change their minds to
purchase even fewer goods.
So for an entrepreneur, the PED aspects have to be understood for the following
reasons among others:
On Pricing: It is easier to determine how much to charge the clients in order to
lift maxim revenue after ascertaining how the users will respond to price
alterations. As an instance, very high elasticity products means by cutting prices
they can record very large increases in the quantity sold and thus increases in
revenues.
On forecasting and Management: PED assists in estimating the degree of impacts
sales and revenues will take when price changes are instituted. In as much as often
it is a price inelastic product, its price is not decreased. Because of People’s
sensitivities/elasticity of our product, we understand that the answer will be
associated with the quantity sold at a total lower price.
Competitive Strategy: In such markets where substitutes are many, there is likely
to be a high PED, that is, consumers can easily opt for alternatives on increase of
the price. There are important benefits that can be understood from this that can
help an entrepreneur to reposition their product.
Income elasticity of demand refers to the relationship between demand for a good
and the changes in the income earned by the consumers. It is derived mathematically
as:

If YED is more than one, the good luxury and its demand rises by much more than the
increase in income. If YED lies within 0 and 1 then the good is termed as necessity
and demand increases toward the rise in income, but not as greatly. While a YED
below zero is an inferior good as the income tends to increase, the level of demand
decreases.
For businessmen, YED is significant in;
Market Segmentation: The YED is significant in doing market segmentation. For
instance, manufacturers of luxury goods seek high-income earners while the targets
for those with lower income earners are other basic items.
Expansion Planning: YED is important in projecting growth in demand based on the
various economic environments. When the economy is in boom periods, people tend to
spend on luxury goods and hence this period could be good to increase the size of
the business.
Product Development: With the knowledge of income elasticity of their products,
entrepreneurs are able to create more and market existing products that meet
modifications in income levels.
Thinking about a company like Gucci, only in the top section of the fashion. In the
case of Gucci, this information is important as YED is very high for the luxury
products which are demanded. As the economy revives and the purchasing power
increases, it is likely that there will be increased demand for Gucci. On the other
hand, for a basic or necessity product such as bread, PED is vital. Being a
necessity with an inelastic demand, producers of bread must appreciate the fact
that demand will not change significantly with price increases. However, they
should be careful when setting prices so that demand and revenue do not drop too
dramatically.
To wind up, even though both PED and YED are relevant to the business practice in
which they concern, the focus and importance of each will vary depending on the
business situation. Entrepreneurs need to understand the market and the nature of
their products to appreciate which form of elasticity in their decisions would be
more relevant.