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I am a bit confused with PED
If demand for a product is elastic and:
1. price has been reduced.
-The effect it will have is that sales demand will increase and so does sales revenue.
However, how about costs and profits? Does costs increase?2. price has been increased
– The effect it will have is sales demand will reduce and so does sales revenue?
But are the effect on profit? A increase in SP is accompanied by the a reduced in quantity produced and thus a reduced in cost; increase in profit.
Am I getting it right here?All the price elasticity tells us is to what extent demand will change if the price is changed. It does not tell us what will happen to the total profit.
If demand is elastic, then certainly a lower price will result in increased sales. However what happens to the costs is not measured by elasticity – cost per unit might stay the same, or it might reduce because of making higher quantities. To decide on the best selling price would mean doing the normal exercises using either the tabular approach or the algebraic approach, depending on the question.
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