Price Elasticity of Demand

Substitutes

More substitutes - more price elastic demand

Less substitutes - less price elastic demand

Percentage of Income

What percentage of a customers income i s the good / service likely to cost. A high percentage - more elastic, a low percentage - more inelastic

Luxury / Necessity

Luxuries tend to have more price elastic demand, whereas necessities tend to have more price inelastic demand

Addictive / Habit farming

These goods / services tend to have a price inelastic demand

Time Period

Where there is only a small period of time within to purchase, the more price inelastic demand will be, whereas when there is no rush, demand will be more price elastic.

Raising selling price and price elastic demand

Sales revenue falls

Raising selling price and price inelastic demand

Sales revenue rises

Lower selling price and price elastic demand

Sales revenue rises

Lower selling price and price inelastic demand

Sales revenue falls

Price Elastic

When there is a change in price, leads to a greater percentage change in quantity demanded than the percentage change in the price. Demand is relatively responsive to price (>1) (Price rises, demand falls)

Price Inelastic

When there is a change in price, leads to a lesser percentage change in quantity demanded than the percentage change in the price. Demand is relatively unresponsive to price. (<1) (Price rises, demand remains high)

Unitary Elastic

When there is no change in demand as a result of a change in price (1)

Perfectly Elastic

An extreme case where the quantity demanded changes by an infinite amount in response to any change in price. (0)

Perfectly Inelastic

When there is no change in the quantity demanded, but much the price is raised or lowered. (infinity)

What is PED?

Price Elasticity of Demand, measures responsiveness of quantity demanded given a change in price

Price Elastic curve

• Horizontal demand curve

• Demand quantity > price quantity

• ie. consumers are more sensitive to price charged

• PED>1

Price Inelastic curve

• Vertical demand curve

• Demand quantity < price quantity

• ie. consumers are less sensitive to the price being changed

• PED<1

Price Unitary Elastic curve

• Equal demand curve

• Hyperbolically curved

• Demand quantity = price quantity

• ie. retailer is unlikely to be better off from changing their prices

• PED = 1

PED formula?

Percentage of change of quantity demanded / percentage change of price