Suggested Answers of BT2 Revision Package - ASKnLearn

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Suggested answer (b)Price elasticity of demandThe price elasticity of demand (PED) measures the responsiveness of a change in thequantity demanded of a good to a given change in the price of the good itself, ceterisparibus.The numerical value of the price elasticity of demand is always negative, which merelymeans that the price and quantity demanded of a good have an inverse relationship. Wetend to ignore the negative sign when interpreting the PED value, i.e. we take the absolutevalue.If the numerical value of price elasticity of demand is greater than one, i.e. PED >1, then thedemand for a good is said to be price elastic. If PED < 1, the demand for a good is saidto be price inelastic.Price elasticity of SupplyThe price elasticity of supply measures the responsiveness of a change in the quantity suppliedof a good to a given change in the price of the good itself, ceteris paribus.The numerical value of price elasticity of supply is always positive, which merely means thatprice and quantity supplied for a good have a direct relationshipIf the numerical value of price elasticity of supply is greater than one, i.e., PES >1, then thesupply of the good is said to be price elastic. This means that a change in the price of a goodwill cause a more than proportionate change in quantity supplied, ceteris paribus.If PES < 1, the supply is said to be price inelastic. This means that a change in the price of agood will cause a less than proportionate change in quantity supplied, ceteris paribus.Relevance of PED to Premier TaxisPremier Taxis is a profit maximizing producer. Profits are the difference between total revenue(price x quantity) and total cost. Profits will increase if total revenue increases while total costremains constant or while total revenue increases more than the increase in total cost. Since aPremier Taxis can usually control the price of its good, knowledge of the price elasticity ofdemand would help Premier Taxis in its pricing strategies in order to increase total revenue andhence profits.
The producer can use the knowledge of PED for its good to reduce or increase the priceso as to increase its total revenue.Premier Taxis would be likely to have many competitors such as ComfortDelgro, CitiCab andSMRT who are close subsititutes. Hence, the demand for Premier taxis is price elastic.As such, the producer should lower its taxi fare. This will cause a more than proportionateincrease in quantity demanded, ceteris paribus. Thus total revenue increases assuming totalcost remains constant or increase in cost to a smaller extent, then its profits would rise.However, when Premier Taxis lower their price, its competitors would very likely follow suit andmay even lower their prices more. This would trigger a price war which could result in allproducers being worse off and only benefiting the consumers. Thus, price cuts may not alwaysbe a good strategy.In view of rising costs of fuel, costs of production have risen. Hence, for Premier Taxi, it not onlyneeds to consider strategies that increase its total revenue, there is also a need to considerstrategies to reduce costs as well. For example, the Premier Taxi can negotiate bulk discountfor entire taxi fleet for servicing, maintenance and fuel costs. However, the firm must increasetaxi fleet so as to increase EOS enjoyed.Perhaps, a better strategy is to increase its demand and/or to make the demand for hisproduct price inelastic by product differentiation and product development.Product differentiation includes using strategies like advertising, product branding, promotionslike giving free gifts etc. Product development involves using research and development andinnovation to improve on product design of taxis, either to improve comfort or facilities offered inthe cab; or to improve fuel efficiency of the taxi, hence lowering costs and consequently prices;or improving the quality of the services provided, such added convenience for customers:nets/credit card payment modes, to improve customer service of call service personnel andtaxi drivers through training like phone service etiquette, familiarity to routes, improvelanguage ability and promoting places of interests to foreign visitors, advertising/branding ofservice standards on fleet of well-maintain taxis, promptness of call service centre(hardware) and experience of taxi drivers (software) and to increase the source of revenueby selling advertisement spaces on taxis.
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ST ANDREW’S JUNIOR COLLEGEH1 ECON
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demand for hotel accommodation. The
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Cost/Benefits/$ Welfare loss MSC =
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more than proportionate fall in qua
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Price S P 1 P 2 D 1 D 2 Market for
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ERP• Works by charging drivers an
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2010 YJC Prelims H1 Paper CSQ1: Hou
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Knowledge, Application, Understandi
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aggregate demand in U.S. and decrea
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Marking SchemeL3Well developed expl
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Conclusion on demand management pol
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E2 For an evaluative assessment bas
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• Exchange rate policy may not be
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economic growth, a fall in demand-d
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Suggested Answers of BT2 Revision Package - ASKnLearn

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