Business – 8.1 Marketing analysis – Elasticity | e-Consult
8.1 Marketing analysis – Elasticity (1 questions)
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Model Answer:
Because the PED is –2.0 (absolute value > 1), demand is price‑elastic. For a price‑elastic product, a reduction in price leads to a proportionally larger increase in quantity demanded, which raises total revenue.
Illustration:
- Current price = £10, quantity sold = 1,000 units → Revenue = £10,000.
- Price is reduced by 5% to £9.50.
- Percentage change in quantity = –PED × % change in price = 2.0 × 5% = 10% increase → New quantity = 1,100 units.
- New revenue = £9.50 × 1,100 = £10,450.
The revenue rises from £10,000 to £10,450, confirming that a price cut is the appropriate strategy when demand is elastic.