Calculating Price Elasticity in Food Service Industry
The food service industry provides excellent price elasticity of demand examples in real life. Consider the case of sausage rolls priced between £2 and £3, where understanding elasticity becomes crucial for pricing strategy.
Highlight: When calculating price elasticity, we use the formula:
PED = ÷
For products with elastic demand PED>1, businesses must be particularly cautious with price increases. A 10% price increase in an elastic market PED=−2 would result in a 20% decrease in quantity demanded, significantly impacting revenue.
Vocabulary: Key terms for understanding elasticity:
- Elastic Demand: PED > 1
- Inelastic Demand: PED < 1
- Unit Elastic: PED = 1
The determinants of price elasticity of demand include availability of substitutes, necessity versus luxury status, proportion of income spent, and time period considered. These factors help explain why some products, like basic food items, tend to be more inelastic compared to luxury goods like designer dresses.