Formative class

a. Distinguish between price elasticity of demand (PED) and income elasticity

of demand (YED)? [10 marks]

PED measures the responsiveness of the quantity demanded of a good to a change in

its price. It is calculated as the percentage change in quantity demanded divided by the
percentage change in price. PED can be classified as elastic when it is greater than 1,
inelastic when it is less than 1, or unitary elastic when it is equal to 1.

YED measures the responsiveness of the quantity demanded of a good to a change in

consumer income. It is calculated as the percentage change in quantity demanded
divided by the percentage change in income. YED can be classified as normal when it
is greater than 0, or inferior when it is less than 0. And it indicated whether a good is a
normal or inferior good.
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b. Using real-world examples, discuss how firms can use price elasticity of
demand (PED) and income elasticity of demand (YED) analysis to increase their
sales revenue. [15 marks]

- setting optimal prices

- identifying luxury vs necessity goods
- product differentiation
- promotional strategies
- adjusting production levels
- market expansion
Setting optimal prices: if a good has an elastic demand firms can increase revenue by
reducing prices. If a good has inelastic demand, firms can increase revenue by raising
prices.
Luxury vs necessity good: for goods with high income elasticity, firms can focus on
marketing strategies targeting higher income consumers , which boosts sales. In
contrast goods with low income elasticity. Good with low income elasticity enable firms
to emphasizes affordability and accessibility
Product differentiation: Firms can diversify their product range in order to cater to
different income groups, this addresses diverse consumer preferences and income
elasticities.
Promotional strategies: understanding PED can help firms design effective sales
promotions. For elastic goods price discounts can be attractive, while for inelastic
goods with added promotions may be more effective.
Adjusting production levels: knowledge of PED can help firms anticipate changes in
demand following price adjustments, this allows better production planning and more
effective inventory management.
Market expansion: identifying goods with high income elasticity enables firms to target
emerging markets or demographics with increasing incomes, encouraging business
growth.
Real life example: The demand for smartphones (PED) and luxury watches (YED), in
response to price changes and shift in consumer income levels.

The global smartphone market to hit a decade low in 2023, happened because
shipments are not equivalent to sales, excess in supply.