3.3.2 PED Flashcards
price elasticity of demand definition
a measure of how responsive demand is to a change in price
there is an inverse relationship between price & demand.
-as price goes up, demand goes down
-as price goes down, demand goes up
Price ELASTIC demand
A change in price will lead to a MORE THAN PROPORTIONAL change in demand. (demand is SENSITIVE to price changes)
-best to LOWER prices.
price INELASTIC demand
A change in price will lead to a LESS THAN PROPORTIONAL change in demand.
(demand is NOT sensitive to changes in price)
-best to INCREASE prices.
how to calculate PED:
% change in price
in business it is assumed PED will always be what?
NEGATIVE
(price and demand will always move in opposite directions)
if PED is less than -1
demand is price ELASTIC
-decrease prices to increase demand
if PED is between 0 and -1 (e.g -0.5)
demand is price INELASTIC
-increase prices for higher revenue
Factors influencing PED
availability of substitutes
price of competitor goods
time
branding
income
nature of good
Availability of substitutes
The closer the substitutes and the more available= the higher the PED
price of competitor goods
if prices of goods in competition with a product increase then this will affect demand and PED.
time
longer time period= higher PED, more time other firms have ability to produce similar products and customers have more chance of adapting their buying habits.
Branding
creating brand loyalty firms know their customers will be willing to pay more for product, therefore they can raise prices as PED is LOWER. (INELASTIC)
Income
higher consumer incomes, price is less important, easier for firms to raise prices as PED is LOWER. (INELASTIC)
Nature of the good
-Luxury good= price ELASTIC, demand more sensitive to changes in price.
-Necessity good=price INELASTIC, demand less sensitive to changes in price.
