Hi everybody, elasticity can be very useful for a business. Let's look at each of the elasticities and see the business use of them. We'll start with PED.
Well, as we've learned already, PED is very important for businesses when making pricing decisions to increase total revenue. We've studied already that if a business knows that demand for its product is price elastic, it should reduce the price to increase total revenue. Whereas if demand is price inelastic, they should raise their price to increase total revenue.
Very important there for pricing decisions. also just generally for employment, stocks and output purposes. So if again a business knows that demand for their product is price elastic and the price is going to fall in the future, in the near future, then they need to be prepared for an increase in quantity.
They've got to make sure they can produce that maybe by employing more people, maybe by increasing their level of stocks, maybe by increasing the productivity of their workers. But they've got to find a way to increase output, very important for that reason therefore. Price elasticity of supply is also crucial for a business because a business...
Businesses will always want to make sure that supply is as price elastic as possible. Businesses always want to be ready to supply more, for example, if price goes up or if demand increases, but also to supply less if price falls or demand decreases. Having flexible supply, flexible production is very important.
So how can a business make supply as price elastic as possible? Well, remember your determinants of P.S., your Pssst factors. What can they do?
What's the way to reduce production? production like times. They could maybe increase the level of stocks. They could increase the level of spare capacity that they have by maybe expanding their factory, by employing more capital machinery.
They can make their factors of production more substitutable through trading, through employing the right kinds of factors of production for that business. Whatever, they could do a variety of things that they might need to do in order to make supply as price elastic as possible. Businesses always want to have flexible production.
What about when it comes to ex-city? Well, remember ex-city tells us two things, whether goods are complements or substitutes and also how strongly related they are. That can be very important when it comes to making pricing decisions.
Take complements, for example. If a business is making two complements, like Epson, make printers and printer ink. Like Nespresso, make Nespresso machines and Nespresso capsules. For both those businesses, if they've worked out through XCD that these goods are very closely related, which clearly they are, then they can reduce the price of the first good. and increase the price of the second.
So for Epson, they can reduce the price of printers and massively increase the price of the ink. That's a very strong compliment that is bought very strongly alongside the printer. Same thing for Nespresso, reduce the price of machines, increase the price of capsules. That's exactly what both companies do in the real world, right? So very useful for pricing decisions there to increase revenue and profits for the company.
But if you're producing substitutes, it's very important too. So if you know that the good that you're producing is a very close substitute with another one, maybe... you might want to consider cutting your price to get ahead of your rival. Absolutely, you might want to do that.
You've also got to bear in mind that if your rival cuts price, you've got to be prepared to follow and reduce yours. So if you're producing substitutes, pricing decisions are important. But also maybe looking at non-price competition.
So again, if you're a substitute, a close substitute with another good or service, cutting your price might trigger a price war and that might not be in your best interest at all. In which case competing on non-price factors is good. for two ways. It avoids you getting into price wars, but it also might reduce the substitute nature of your good.
It might make the relationship between the substitutes less strong, which again is in your interest in the future going long term. But it's also very important to look at XED for employment stocks and generally what to do with output again. So if you again are producing substitute goods and you're looking at reducing your price, if the other firm is not going to follow you, then you've got to be prepared to increase your output by increasing it.
employment, maybe by increasing stocks, maybe whatever. Whereas if your rival maybe is considering cutting their price and you can't follow, you've got to be prepared for a decrease in output by doing one of these things here. So being prepared in that regard is absolutely crucial, very, very important. For YED, so important for a business when planning for booms and recessions. So again, YED tells us two crucial bits of information.
Yes, it tells us the responsiveness of quantity demanded given a change in income, but it also tells us the... kind of good being produced. Is it a normal good? Is it an inferior good that we're looking at?
So that can be very important when planning for recessions and booms. So for example, if you're a business and you know you're producing a normal good, then if a boom is coming your way, two things come to mind. You might want to consider raising your price knowing there's going to be a huge flock of demand and maybe you can increase your revenues, your profits by increasing price.
But certainly you can expect a large flock of demand. You've got to be prepared to produce that output, maybe by increasing employment, maybe by increasing stocks. maybe by increasing the productivity. of workers, whatever, there's got to be a way of you increasing your output.
Vice versa, if a recession is coming your way. Whereas if you're producing a inferior good, and you forecast a recession is coming your way, that's great for you. You might want to consider maybe increasing your price, just depends.
depends on how bullish you are as a business, but certainly be prepared to increase output in some way as we've talked about before. So crucial there in planning for recessions and booms, so important, especially if you know that your good or service is very sensitive to changes in income. But there is one thing to consider. Elasticity can be so useful in so many ways, as explained here, but you've got to keep these limitations in mind always when you're talking about business use of elasticity. First one is that elasticity calculations and figures are only ever estimates, and that's because of how these calculations are made and how the data is collected.
Often the data will be collected through surveys, and you can never really trust survey responses. So, for example, you know, I as a business, I'm going to increase... prices by 10%, what's going to happen to your consumption? Write down how much your consumption will drop. You can't trust the responses.
And if E-last 60 figures have been generated through survey data, you can always question really if they're fully reliable. Maybe the data has been collected from competitors. So maybe it's competitors have done a certain price change. There's been a change in quantity demanded as a result and you're going to copy that data and use that for yourself.
The problem with doing that is, well, you know, each firm is different. You are very different to a competitor. So therefore, working on elasticity like that might not be fully accurate.
And maybe use past data to inform what's going to happen with demand if you change price in the future. But again, current consumer habits might have changed very different compared to previous consumer habits. So therefore, using past data might not be fully accurate either.
So elasticity figures are only other estimates. Therefore, they may be inaccurate, they may be unreliable, they may change over time. If business...
must be careful, therefore, and use elasticity as a guide, yes, as a general guide, but maybe not on its own to make some very important decisions here regarding price, regarding employment, etc. Also, these figures here, all of these elasticities assume Cetra's parabus. They assume that only one factor will affect demand, so maybe price, maybe the price of a complement or a substitute, maybe income. For supply, only price.
But there are many other factors that can affect demand. There are many other factors that can affect supply. supply.
So business has got to be very careful, especially on these demand ones, that when they make crucial decisions on the price, employment, etc., they don't just consider the impact on price, they don't just consider the impact on income or whatever. They look at all the factors that can affect demand as well to get a general view of what should be done regarding price, regarding employment, etc. And lastly, for PED, it varies along the demand curve. You've probably seen my video on that already and understand this concept.
And that means for a business, they can't keep changing that price by the same amount and expecting the same impact on quantity demanded. So, for example, if a business before increased price by 10% and quantity demanded only fell by 1%, it doesn't mean the next time they increase price by 10% that quantity demanded is going to only fall by 1%. They have to make new calculations each time because PED varies along the demand curve. That's a very important factor to consider as well.
So this is all the stuff that you need to see the business significance of your elasticity and limitations that covers the elasticity perfectly thank you so much for watching guys i'll see you all in the next video