a) Price elasticity of demand

a) understanding of price elasticity of demand

b) use formulae to calculate price elasticities of demand

c) inter[ret numerical values of price elasticity of demand: unitary elastic, perfectly and relatively elastic, and perfectly and relatively inelastic

d) the factors influencing elasticities of demand

the law of demand = price of a good or service increases → quantity demanded decreases

price elasticity of demand = how sensitive the change in quantity demanded is to the change in price

PED = (%ΔQD) / (%ΔP)

• price elasticity of demand = percentage change in quantity demanded / percentage change in price

if PED = 0

• PED is perfectly inelastic

  • change in price → no change in quantity demanded

  • gradient = 0 (perfectly vertical)

if -1 < PED < 0

• PED is relatively inelastic

  • change in price → smaller change in quantity demanded

  • gradient < -1

if PED = -1

• PED is unitary elastic

  • change in price → equal change in quantity demanded

  • gradient = -1

if PED < -1

• PED is relatively elastic

  • a change in the price causes a large change in the quantity demanded

  • -1 < gradient < 0

if PED = infinite

• PED is perfectly elastic

  • the quantity demanded will fall to zero with any change in price

  • gradient = 0 (perfectly horizontal)

determinants of PED

• substitute availability

  • high availability = elastic PED

• product addictiveness

  • high addictiveness = inelastic PED

• product price in proportion to income

  • high proportion = elastic PED

• time period

  • longer time period = elastic PED