2.7 PED Flashcards
PED formula
change % quantity demanded/change % price
PED
Responsiveness of consumers demand to the change in price of a good or service
Types of PED
Elastic demand
Inelastic demand
Unitary
Perfectly Inelastic
Perfectly elastic
Elastic demand
PED > 1
Demand is more responsive to a change in price.
Inelastic demand
PED < 1
Demand is less responsive to a change in price
Unitary
PED = 1
change in % quantity demanded = change in % of price.
Perfectly inelsatic
PED = 0
No matter the price, quantity demanded won’t change.
Parallel to Y axis
Perfectly elastic
PED = infinite
Demand can change to any extent no matter the change in price.
Parallel to X axis
Determinants of PED
SPLAT
Substitute
Proportion of income
Luxury or necessity
Addictive
Time
Substitue
Number of substitutes of a product. more substitute = more elastic because if price increases the consumer might go to the substitute
Proportion of income
How much of a consumer’s income is being spent per unit.
Luxury or necessity
Luxury goods may get passed up on, where as necessities are needed no matter the price.
Addiction
relationship with ped
Hard to combat the addiction so it is price inelastic
Inversely proportional to PED. The more addictive a product is the lesser the PED.
Time
Time given to think about a large purchase may lead to loss of demand, therefore making it more elastic. The customers may go to substitute or spend the money, etc.
Application of PED
Total revenue test of PED
Way to test the PED of a product via the revenue. See if revenue rises or falls as a result of price change
