Price elasticity of Demand

PED

The responsiveness of quantity demanded of a good to a change in price. (%change in QD / %change in £)

Negative or positive

PED is negative because of the inverse relationship to price

Inelastic demand

Quantity demanded is not as responsive to price changes.

The %change in QD is < %change in £, Value is between 0 and -1.

Elastic demand

QD is very responsive to price changes, the %change in QD > than %change in £, value is between -1 and -infinity

Unit or unitary demand

If PED=-1 than the %change in QD = %change in £

perfectly inelastic

PED=0

perfectly elastic

PED=-infiinity

When PED is elastic

A rise in P leads to a more proportionate fall in QD, so total revenue falls

A fall in P leads to a more proportionate rise in DQ so TR rises

When PED is inelastic

A rise in P leads to a less proportionate fall in QD, so TR rises

A fall in P leads to a less than proportionate rise in QD, so TR falls

When PED is unitary

TR will not change when prices change

Factors influencing PED

Availability of close substitutes

Cost of switching supplier

Breadth if production definition

Degree of necessity

Time frame when making a choice

Brand loyalty

%of income spent on product

Habitual demand

Use of PED

Determination of pricing policy/impact on revenue

Indication of competition faced (number/closeness of substitutes)

price setting in price discrimination

Government decision on which goods to tax indirectly