1.2.4 PED, 1.2.5 YED

price elasticity of demand

• a measure of how responsive demand is to a change in price

• calculated as % change in quantity demanded / % change in price

price elastic demand

• value of PED is more than 1

• change in demand is more than the change in price meaning a change in price will lead to a more than proportional change in demand

price inelastic demand

• value of PED is less than 1

• change in demand is less than the change in price meaning demand is not so sensitive to changes in price

factors influencing PED

• availability of substitutes: products that have alot of alternatives are elastic

• time: longer time period = higher PED (more elastic)

• branding: products with strong brand loyalty tend to be inelastic so they can charge higher prices

• income: higher income = higher prices so products are inelastic

• nature of good: necessities and habits tend to be inelastic and luxuries tend to be elastic

income elasticity of demand

• a measure of how responsive demand is to a change in income

• calculated as % change in quantity demanded / % change in income

income elastic demand

• value of YED is more than 1

• typically luxury goods

• demand is changing more than the change in income

• as income grows, more is spent on luxuries

income inelastic demand

• value of YED is between 0 and 1

• typically necessity goods

• demand is changing less than the change in income

• as income grows, less is spent on necessities

inferior goods (YED)

• YED is less than 0

• demand falls as income rises because they can afford better alternatives

• elastic inferior: more than -1, demand changes more than the change in income

• inelastic inferior: less than -1, demand changes less than the change in income