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What is elasticity?
Elasticity measures the responsiveness of demand to change in a relevant variable- such as price or income
What is the price elasticity of demand?
Price elasticity of demand measures the extent to which the quantity of a product demanded changes in response to a change in price
What is the equation for price elasticity of demand?
% Change in Quantity Demanded/ % Change in Price
Why does price elasticity of demand matter?
If PED > 1 (Price elastic) then a change in price will cause a larger change in demand
Overall revenues would increase with a price cut
Overall revenues would fall with a price increase
Opposite is the case if PED < 1 (Price inelastic)
What are the factors influencing price elasticity of demand?
Brand strength: Products with strong brand loyalty and reputation tend to be inelastic
Necessity: The more necessary a product, the more demand tends to be inelastic
Habit: Products that are demanded and consumed as a matter of habit tend to be price-inelastic
Availability of substitutes: Demand for products that have lots of alternatives (substitutes) tends to be price-elastic
Time: In the short run, price changes tend to have less impact on demand than over longer periods
