price elasticity of demand

What is the definition of PED

The responsiveness of demand to a change in price

What is the formula

Percentage change in QD/ percentage change in price

Perfectly inelastic demand definition

A change in price leads to no change in demand

Price inelastic demand meaning

A change in price leads to a proportionally smaller change in demand ped between 0 and -1

Price elastic demand definition

A change in price leads to a proportionally larder change in demand PeD is between -1 and - infinity

Perfectly elastic demand

A change in price leads to an infinite change in demand A price rise causes the demand to fall to zero

What are the factors affecting PED

Proportion of income

The larger the proportion of income a product is the more elastic

◻ Loyalty

Strong customer loyalty will be more inelastic (branding, quality,

etc.)

◻ Addictiveness

Goods with addictive or habitual tendencies are more inelastic

◻ Necessities

Necessities more inelastic, luxuries more elastic

◻ Time

The longer the time since the price changed the more elastic

◻ Substitutes

The closer/stronger the substitutes the more elastic

Branding has the effect of differentiating a good more - inelastic

How does PED affect total revenue when demand is elastic?

A fall in price increases total revenue, a rise in price decreases total revenue.

How does PED affect total revenue when demand is inelastic?

A fall in price decreases total revenue, a rise in price increases total revenue.

Why is PED important for businesses?

It helps firms decide on pricing strategies to maximise revenue.

Why is PED important for governments?

A: Helps predict effects of indirect taxes (e.g. VAT, excise duty) on consumption and tax revenue.

What does it mean if PED = 0?

A: Demand is perfectly inelastic – demand does not change when price changes.

What does it mean if PED = ∞ (infinity)?

 Demand is perfectly elastic – consumers buy nothing if the price rises.