2.5.1 - Price elasticity of demand Flashcards
Definition of PED
Responsiveness of quantity demanded for a good to a change in its price
State the PED formula
% change in Qd / % change in P
Is PED always negative or positive
Negative, the negative value is ignored because it is always assumed to be negative.
Define price elastic demand
PED > 1
Unitary elastic demand
PED = 1
Price inelastic demand
PED < 1
What is the trend in elasticity of demand as the price decreases?
As the price of a good decreases, its PED becomes more inelastic.
State the 5 determinants of the elasticity of demand
- Number and closeness of substitutes
- Luxury or necessity
- Proportion of income
- Type of consumer
- Time
Explain number and closeness of substitutes as a determinant of demand
The greater the number of substitutes, the more elastic the good is. This is because consumers ca easily swap when the price changes.
Explain luxury or necessity as a determinant of demand
- Necessity goods tend to be more price inelastic because consumers need to buy them regardless of price.
- Luxury goods tend to be more elastic because consumers don’t need to buy them when their price increases.
Explain proportion of income as a determinant of demand
The demand for goods that are a smaller portion of household income have more inelastic demand.
Explain type of consumer as a determinant of demand
High income consumers tend to be less responsive to price changes due to a smaller real-income effect.
Explain time as a determinant of demand
PED tends to become more elastic over time because consumers can alter their consumption patterns in response to a price change.
Explain the relationship between PED and revenue
- When the demand for a good is inelastic, total revenue increases when price is increased
- When the demand for a good is elastic, total revenue increases when price is decreased
What is the PED for commodities?
Relatively inelastic
