Who Finds PED Useful?

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A monopolist, who has complete control of the market, can use their knowledge of PED to fix a market price that they know will not have an overly negative effect on quantity demanded so that they, too, can maximise revenue

Who Finds PED Useful?

The theory behind PED, and a knowledge of the PED of various items is useful to a number of parties:

Suppliers

Suppliers are very interested in the elasticity of demand of their products.

If suppliers are considering an increase in prices, a knowledge of the PED of their products will be extremely valuable in making a decision about which products to increase prices on.

For example, if they have 2 products, and they know one product has a PED of -1.3, and the other has a PED of -0.4, they will increase the product with a PED of -0.4, as it relatively inelastic, and thus an increase in price will not result in a corresponding fall in quantity demanded, thus increasing overall revenue

The Government

When deciding its fiscal policy, the government will often look at the PED of various consumer items to see which ones to increase VAT or duties upon.

The government will focus on taxing those items which are relatively inelastic (such as cigarettes and alcohol), as they know demand will not be hugely affected by the increase in price, and thus they can maximise their tax revenue

Monopolists

Who Finds PED Useful?