How Prices are determined - price elasticity of demand

Price Elastic

When there is a change in price, leads to a greater percentage change in quantity demanded than the percentage change in the price. Demand is relatively responsive to price (>1) (Price rises, demand falls)

Price Inelastic

When there is a change in price, leads to a lesser percentage change in quantity demanded than the percentage change in the price. Demand is relatively unresponsive to price. (<1) (Price rises, demand remains high)

Unitary Elastic

When there is no change in demand as a result of a change in price (1)

Perfectly Elastic

An extreme case where the quantity demanded changes by an infinite amount in response to any change in price. (0)

Perfectly Inelastic

When there is no change in the quantity demanded, but much the price is raised or lowered. (infinity)

What is PED?

Price Elasticity of Demand, measures responsiveness of quantity demanded given a change in price

Price Elastic curve

• Horizontal demand curve

• Demand quantity > price quantity

• ie. consumers are more sensitive to price charged

• PED>1

Price Inelastic curve

• Vertical demand curve

• Demand quantity < price quantity

• ie. consumers are less sensitive to the price being changed

• PED<1

Price Unitary Elastic curve

• Equal demand curve

• Hyperbolically curved

• Demand quantity = price quantity

• ie. retailer is unlikely to be better off from changing their prices

• PED = 1

PED formula?

Percentage of change of quantity demanded / percentage change of price