the market: Price elasticity of demand

price elasticity of demand (PED)

the responsiveness of demand to a change in price

aka how much changing the price affects demand

elasticity

responsiveness/sensitivity

price inelastic demand PID

where a change in price results in a porportionally smaller change in demand

explanation for PID

where the price for a product/service varies regularly and does not affect demand to a large extent e.g petrol, flight prices

elastic

a change in demand leads to a change in price

price elastic demand

a change in price results in a proportionally greater change in demand

price elasticity of demand formula

new - old / old X 100

how to interpret price elasticity

if x>1 price elastic therefore demand is sensitive to changes in price

if x <1 price inelastic demand is insensitive to change in price

factors affecting PED

• time

• competition for the same product

• branding

• proportion of comuner incomes spent on the product

how does time affect PED

PED decrease over time they are indirectly porportional

this is because more substitutes get produced and people get better at making substitutes

how does competition for the same product affect PED

they are directly proportional

if competition increase PED increases

increased competition leads to an abundance of substitite and better quality of substitutes

how does branding affect PED

decreases PED

strong brand = smaller effect of substitutes

strong brand = lower PED

how does the proportion of income spent on a product affect PED

indirectly proportional

the lower the porportion of consumer income spent on the produce the greater the price inelasticity

effect of price elasticity on demand and pricing

• demand isnt very quanitfible so their is no proof for a fall in demanf

• price depends on how quanitfiable demand is

• this leads to an effect on PED and price elasticity

• therefore there is a lot of uncertainty associated with demand and PED

how doe price, demand and revenue affect eachother

a change in price leads to a change in demand which leads to a change in total revenue

why do we calculate PED

to know the effect of a particular change in price on total revenue

demand is price elastic so an increase in price will increase revenue