1.2.4 Price elasticity of demand

What is the price elasticity of demand

How is it calculated

How responsive demand is to change in price

Always expressed as a negative

%change in quantity demanded ÷ %change in price

Price Elastic meaning

Price Inelastic meaning

Elastic - Demand changes when price changes

Inelastic - Demand does not change much when price changes

What is the relationship between price and demand curve

Inverse relationship

Price goes up = demand goes down

Price goes down = demand goes up

When is a product price elastic

When is a product inelastic

The PED is more than 1

The PED is less than 1

What 3 factors influence PED

Availability of alternatives

Brand loyalty

Type of good (Luxury or Necessity)

What goods are usually elastic

What goods are usally inelastic

Goods with lots of alternatives

eg a breand of bread/chocolate

Necessitys or luxury goods

How is the PED value useful to a business

They can adjust their pricing strategy to maximise their revenue

Best pricing strategy for Inelastic products

Price skimming - Initially set price as high and gradually lower over time

Best pricing strategy for Elastic products

Competitive pricing