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Elasticity Application and Limitations Table

Elasticity concepts such as PED, YED, and CED can help firms formulate pricing, output, and product strategies. However, their application in the real world faces limitations. Specifically, the assumptions of ceteris paribus and perfect information are often violated as multiple factors simultaneously influence demand. Additionally, elasticity analysis ignores supply-side constraints and costs, which are important for maximizing profits. Therefore, while useful as a starting point, elasticity theory alone is insufficient and must be adapted to real-world complexities for strategies to be truly effective.

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1K views

Elasticity Application and Limitations Table

Elasticity concepts such as PED, YED, and CED can help firms formulate pricing, output, and product strategies. However, their application in the real world faces limitations. Specifically, the assumptions of ceteris paribus and perfect information are often violated as multiple factors simultaneously influence demand. Additionally, elasticity analysis ignores supply-side constraints and costs, which are important for maximizing profits. Therefore, while useful as a starting point, elasticity theory alone is insufficient and must be adapted to real-world complexities for strategies to be truly effective.

Uploaded by

davidboh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as ODT, PDF, TXT or read online on Scribd
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Elasticity

Application / Strategy
Type Strategies Conditions Outcome
PED Pricing
Strategy
Elastic lowers P
Inelastic increases P
Increases sales revenue
YED Output
Strategy:
What to
produce
1 Identify goods normal
elastic: lu!ury goods
inelastic: necessities
O" in#erior
$$$$% Set output accordingly as Y
change
Recession: Dd #or in#erior gds &ill rise $$% increase
pdn o# lo& ends'no #rills pdts such as (udget airlines
Boom: Dd #or normal gds &ill rise esp lu! gds $$%
introduce high end goods such as iPhone ) $$% locate
shops at prime area as pple &ill shop more in such areas
*ED "eaction to
Price change:
unli+e PED, it
is a reaction
rather than an
initiati-e
.ollo& suit (y cutting price &hen
mar+et leader'ri-al lo&er price
Substitutes: Pdt'Ser-ice Differentiation $$% lowers ve
!ED
e/g/ Samsung phones has a (igger screen than iPhone/
0pply computers are more aesthetically pleasing as
compared to 1icroso#t computers/
"lose complements: #oint promotions or 2oint
discounts
e/g/ 0 #irm o##ering slimming pac+ages may organi3e a
2oint promotion &ith a (eauty salon or hairdresser/
$ac%ling assumptions for strategies &' application to t(e real world
4imitations Theory "eality
"eteris paribus
assumption
Basic drawbac% in terms o# real
&orld application o# elasticity
concepts
1eant to simplify economic analysis
assumes not(ing else c(anges e!cept
price, income, price o# related good
respecti-ely
Se-eral #actors such as the P o# a related
good and Y le-el o# the economy may (e
c(anging simultaneously
e/g/ PED inelastic, (ased on PED alone,
shld increase P
5ut i# at the same time, recession,
assuming normal gd, Dd #alls $$% P drops
Information
problem
0ssumes #irms ha-e perfect
information to ma+e rational (usiness
decisions
0ll in#ormation pertaining to
elasticities are a-aila(le to #irms
6ot possi(le to o(tain per#ect in#ormation
In#ormation may (e imperfect)
incomplete) unreliable) inaccurate
6o guarantee strategies &ill (e success#ul
Ignores t(e
supply side of
t(e mar%et
0ssumes supply can easily cope &ith
any change in demand
Should also ta+e price elasticity of
supply into consideration
Whether they can respond #ast to the
change in demand
Cutting prices to stimulate demand may
not success#ully raise sales and re-eune
i# supply cannot cope wit( t(e
increased demand*
Ignores cost
side of t(e
profits e+uation
Only use#ul in helping #irms increase
total revenue
6o cost cutting strategies or
producti-ity enhancing strategies
.ailed to ma!imise pro#its as these
concepts do no ta+e costs into
consideration
0im o# #irm is to ma,imise profit
7ence, #irms loo+ at bot( revenue and
costs in #orumlating strategies to (oost
pro#its
Pro#its8 total re-enue total costs

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