Calculating the Price Elasticity of Demand for Bunty's Greeting Cards
What is the Price Elasticity of Demand for Bunty's greeting cards?
To calculate the Price Elasticity of Demand (PED) for Bunty's greeting cards, we need to use the formula: PED = (% Change in Quantity Demanded) / (% Change in Price) The percentage change in quantity demanded is calculated as follows: Percentage Change in Quantity Demanded = ((New Quantity Demanded - Old Quantity Demanded) / Old Quantity Demanded) * 100 In this case, the old quantity demanded is 75 cards per week, and the new quantity demanded is 100 cards per week. Plugging these values into the formula, we get: Percentage Change in Quantity Demanded = ((100 - 75) / 75) * 100 = 33.33% The percentage change in price is given as a reduction of 15%. Plugging these values into the formula, we get: PED = (33.33% / -15%) = -2.22 Since the PED value is negative, it indicates that Bunty's greeting cards are price elastic. A value of -2.22 indicates that for every 1% decrease in price, the quantity demanded increases by approximately 2.22%. This suggests that customers are quite responsive to price changes, and a decrease in price leads to a proportionally larger increase in demand.
Understanding Price Elasticity of Demand
Price Elasticity of Demand (PED) measures the responsiveness of quantity demanded to a change in price. A PED value of less than -1 indicates that the good is price elastic, meaning that a change in price results in a proportionally larger change in quantity demanded. In Bunty's case, the PED value of -2.22 reflects a high price elasticity, signifying that customers are highly sensitive to changes in the price of her greeting cards.The negative sign in the PED value indicates an inverse relationship between price and quantity demanded. When the price of Bunty's cards decreases by 1%, the quantity demanded increases by 2.22%. This illustrates that customers perceive a reduction in price as a significant incentive to purchase more cards, leading to a boost in demand.
Implications for Bunty's Business
Understanding the price elasticity of her greeting cards is crucial for Bunty's business strategy. With a price elastic product, she can utilize pricing strategies to attract more customers and increase sales. Lowering the price of her cards can stimulate demand and potentially lead to higher revenue despite the reduced profit margin per card.Bunty can also use the PED value to forecast the impact of future price changes on demand. If she plans to raise prices, knowing the price elasticity will help her estimate the resulting decrease in quantity demanded. Conversely, decreasing prices can lead to a considerable increase in demand, as seen in the case calculation.
Overall, recognizing the price elasticity of demand for her greeting cards allows Bunty to make informed decisions regarding pricing strategies and business growth.