Price Elasticity of Demand (PED) (2.2.1)

Price Elasticity of Demand

1. The price elasticity of demand is the responsiveness of a change in demand to change in price.

2. Formula:

3. Price elastic if PED more than 1

4. Price inelastic if PED less than 1

5. Unitary elastic if PED = 0

Perfectly elastic

1. A good where demand falls to zero if price changes. PED = Infinity

2. Conversely demand is infinite if price remains same

3. E.g 500 vendors selling water at £1.00 a bottle

   
   

Perfectly inelastic

1. Is a good where demand doesn’t change if price changes (Life saving treatment)

Proportion of income spent on a good

1. How much a persons total budget or salary goes towards buying a specific item

Factors influencing PED (Necessity)

1. A necessary good, such as bread, petrol, or electricity, will have a relatively inelastic demand.

   In other words, even if the price increases significantly, consumers will still demand

   bread and electricity, because they need it. Luxury goods, such as holidays, are more

   elastic. If the price of flights increases, the demand is likely to fall significantly

Factors influencing PED (Substitute)

1. If the good has several substitutes, such as Android phones instead of iPhones, then the demand is more price elastic.

2. The elasticity can also change within markets. For example, the market for bread is less elastic than the market for white bread. This is because there are fewer substitutes for bread in general, but there are several substitutes for white bread. Hence, white bread is more price elastic. (It’s not niche because white bread has alternatives, whilst bread in general has no alternative)

3. The closer and more available the substitutes are, the more price elastic the demand.

4. Elasticity also changes in the long and short run. In the long run, consumers have time to respond and find a substitute, so demand becomes more price elastic. In the short run, consumers do not have this time, so demand is more inelastic

Factors influencing PED (Habit)

1. The demand for goods such as cigarettes are inelastic, because consumers are addicted to them. So they will still buy if price changes

Factors influencing PED (Proportion of income spent on a good)

1. Demand will be relatively inelastic if a good takes up small proportion of income (e.g bread from £1 to £2)

2. But it will be elastic if it’s a massive increase, like subscription from £20 to £70, where someone would look for an alternative

Factors influencing PED (Durability of Good)

1. Demand will be more elastic if there is a fault in a durable good like washing machine. Because people will just wait till there is a sale to replace, or just repair. Unlike products like milk, if it’s goes bad, demand is inelastic

Factors influencing PED (Brand strength)

1. The more brand loyalty, the more inelastic the demand.

Factors influencing PED (Peak, and off Peak

1. During morning, demand for tickets in trains are higher, because people commute to work. But is low ok the evening/night because people are already home.