Elasticity on Demand, Breakeven Analysis and Pricing Decisions Essay

When a firm changes equipment casualtys, the effect on simoleons is more important than the effect on tax. There is a mere(a) formula to calculate the critical Price grab of demand which is undecomposed sufficient to maintain the role to overheads and dough. This pull up stakes be greater than that unavoidable to maintain receipts. A common issue in business and in business studies is whether a firm should change the prices at which products are offered. The calculations experience with estimates of the reaction of customers to the new prices.This reaction is represented as Price crack of Demand (PED), the ratio of the proportionate changes in lot and price. Students are unendingly told and some students even remember that Elastic Demand (PED &gt1) factor more revenue from a lower price and less from a higher one and Inelastic Demand (PED But who wants the same revenue with lower profits? Any change in price will have a much bigger impact, proportionately, on the contribution per level for the firm than on the intercommunicateing price to the customer.It follows that an gain in price may succeed in raising profits, even though revenue falls and that a lower price may reduce profits even though revenue increases. So the critical question is not whether the PED is greater or less than one, but whether it is sufficiently high (for a lower price) or sufficiently low (for a price increase) to purify profits. The critical level of PED can be found by an drill of breakeven analysis.We can take the current level of contribution to overheads and profit and ask what the volume (units sold) must be to give the same level of contribution at the alternative price. Having found this critical volume, we can then see what the PED would be to give us this volume at the new price, compared with the alive price and quantity. This then will be the Critical Price Elasticity of Demand (CPED). If we are raising prices, any PED less than CPED will increase p rofits if we are lowering price, we want PED to be more than CPED.And maculation there is no way, short of trying the price change, to know what the PED really is, a firm may well have sensible ideas rough the likelihood of its being significantly greater or less than a specified value. It may seem that calculating the CPED is rather a bodge of time, since we should have to calculate the required change in quantity scratch and might just as well reckon our chances of getting this volume after our price change, with by entering into Elasticity computations at all. However it turns out that there is a very simple formula for calculating the CPED.