Price elasticity of demand

definition of price elasticity of demand

definition of price elasticity of demand

A measure of the responsiveness of the quantity of a good demanded to changes in its price.

definition of price elastic

large responsiveness in demand to price.

definition of price inelastic

low responsiveness in demand to price.

how do you calculate PED?

percentage change in demand/percentage change in price.

0<PED<1

inelastic demand

inf. > PED> 1

elastic demand

PED = 1

unit elastic demand

PED = 0

perfectly inelastic demand

PED = infinity

perfectly elastic demand

what does it mean when PED = 1?

% change in quantity demanded = % change in price

what does it mean when PED = 0?

quantity demanded is completely unresponsive to price.

what does it mean when PED = infinity?

quantity demanded is infinitely responsive to price.

what is difference between an elastic and an inelastic demand graph?

inelastic graph is more steep

which goods should firms increase and decrease price in to maximize their profits?

increase price for inelastic and decrease for elastic goods

What are the determinants of price elasticity of demand?

• number and closeness of substitutes

• necessities vs. luxuries

• length of time a consumer gets to make a purchasing decision.

• proportion of income spent on the good

number and closeness of substitutes

the more substitutes, the more elastic

necessities vs. luxuries

necessities are more inelastic, luxuries are more elastic

length of time a consumer gets to make a purchasing decision.

the longer the time allowed for consumer to make a purchasing decision, the more elastic.

proportion of income spent on the good

larger the proportion, the more elastic

what does this graph represent?

PED = 1

what does this graph represent?

PED = inf.

what graph does this represent?

PED = 0

three applications of PED

• total revenue of firms

• pricing decisions of firms

• indirect taxes

How does PED affect total revenue and pricing decisions of firms?

raise prices of inelastic goods and lower prices of elastic goods to maximize revenue.

How does PED impact which firms are more taxed?

Governments often place more taxes on firms which produce inelastic goods because they can increase their price using the consumers to pay their taxes.