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Price Elasticity of Demand (PED)
Measures the responsiveness of the quantity demanded of a good to a change in its price.
PED Formula
PED = (% Change in Quantity Demanded) / (% Change in Price)
Elastic Demand
Occurs when PED > 1; quantity demanded changes significantly with price changes.
Inelastic Demand
Occurs when PED < 1; quantity demanded changes little with price changes.
Unitary Elastic Demand
Occurs when PED = 1; quantity demanded changes proportionally with price changes.
Perfectly Elastic Demand
Occurs when PED = ∞; consumers will only buy at one price, leading to zero demand if the price increases.
Perfectly Inelastic Demand
Occurs when PED = 0; quantity demanded remains constant regardless of price changes.
Availability of Substitutes
More substitutes lead to more elastic demand.
Necessity vs
Necessities tend to have inelastic demand, while luxuries are more elastic.
Proportion of Income
Higher cost relative to income results in more elastic demand.
Time Period
Demand is generally more elastic over the long run as consumers find alternatives.
Brand Loyalty
Strong brand loyalty can make demand more inelastic.
Importance of PED
Helps businesses set prices to maximize revenue.
Taxation
Governments consider PED when imposing taxes; inelastic goods generate stable revenue.
Market Analysis
Understanding consumer behavior and market dynamics through PED.
Revenue Implications
If demand is elastic, lowering prices can increase total revenue; if inelastic, raising prices can increase total revenue.
Business Decisions
PED aids in forecasting sales and adjusting production levels.
Conclusion
Understanding PED is crucial for informed decisions regarding pricing, taxation, and resource allocation.