PED

Definition

<aside> 💡 Responsiveness in the percentage change in quantity demand to the percentage change in price

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Formula

<aside> 💥 Percentage change in Quantity Demand / % Price change in Quantity demand

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Elasticity

<aside> 💡 How much one factor changes when you change another

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It is essentially ‘how responsive demand is to a change in price’. So when the price changes, does demand increase/decrease by a little or a lot. This depends very heavily on the product.

Elastic Demand (Responding)

<aside> 💡 This is when quantity is sensitive to a change in price. So, when price increases, the quantity demand decreases a lot, as they have an inverse relationship.

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Important Information:

• When the percentage change in quantity demand is more than the percentage change in price

• The value of PED > 1

• PED value calculated is always negative, but you apply a modulus to it to make it positive

For example:

Price increase by 10% - Quantity demand decreased by 50%

Price decrease by 5% - Quantity demand increases by 30%

The slope is relatively flatter, and not very steep

Inelastic Demand (Less Responding)

<aside> 💡 This is when quantity is insensitive to a change in price. So, when price increases, the quantity demand decreases but not by much, as they have an inverse relationship.

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Important Information:

• When the percentage change in quantity demand is less than the percentage change in price

• 0 < PED value < 1

• PED value calculated is always negative, but you apply a modulus to it to make it positive

For example:

A good example for inelastic demand is oil/gasoline. When theres an increase in the price of oil, the quantity demand only decreases a small amount as it is a necessity

The slope is very steep

Perfectly Elastic Demand (Total Response)

<aside> 🔑 Change in price will lead to total change in quantity demand Quantity demand falls to 0

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Perfectly Inelastic Demand (No/Zero Response)

<aside> 🔑 Change in price will lead to no change in the quantity demand

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Unitary Demand (50/50 Response)

<aside> 🔑 Percentage change in quantity demand is the same as the percentage change in price

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Determinants: SPLAT

Substitutes:

Elastic:

When there are a lot of substitutes, an increase in price will mean a larger fall in quantity demand. This is because they have many options.

Inelastic:

When there are little substitutes, an increase in price will mean a smaller fall in quantity demand. This is because they have little options.

Proportion of Income Spent:

Elastic:

When the price of goods uses a high proportion of total income, an increase in price will mean a larger fall in quantity demand. This is because it will largely affect the amount of money they have.

Inelastic:

When the price of goods use a low proportion of total income, an increase in price will mean a smaller fall in quantity demand. This is because it will only affect a small amount of money they have.

Luxury Goods:

Elastic:

When the goods are not necessities, an increase in price will mean a larger fall in quantity demand. This is because it is non-essential item.

Inelastic:

When the goods are necessities, an increase in price will mean a smaller fall in quantity demand. This is because it is an essential item.

Addictiveness:

Elastic:

When the addictiveness of the goods are low, an increase in price will mean a larger fall in quantity demand. This is because it is non-addictive so consumers can live without it.

Inelastic:

When the addictiveness of the goods are high, an increase in price will mean a smaller fall in quantity demand. This is because it is addictive so consumers cannot live without it.

Time Taken:

Elastic:

When the time taken to make the purchase of the goods is long, an increase in price will mean a larger fall in quantity demand. This is because consumers will have the time to make comparisons.

Inelastic:

When the time taken to make the purchase of the goods is short, an increase in price will mean a smaller fall in quantity demand. This is because consumers will not have the time to make comparisons.