Elasticity Of Demand As unit 2 Flashcards
What is the definition of price elasticity of demand (PED)
A measure used to show the responsiveness or elasticity of the quantity demanded of a product to a change in its price.
For example what will happen to the demand of a product if the price increases.
What is the definition of income elasticity of demand (YED)
A measure used to show the responsiveness or elasticity of the quantity demanded of a product to a change in consumer income
What is the PED equation
% change in quantity of demand / % change in price
What is PED useful for
It can be used to show how elastic products are to price changes
What does it mean if PED is 0 or less
This means demand is inelastic therefore, demand for the product is unchanged when the price changes.
What does I mean if PED is between 0 and one
The percentage change in the demand is smaller than the percentage change in the price causing demand to be inelastic
What does it mean if PED is one
The percentage change in the demand is exactly the same as the percentage change in the price causing demand to be unitary elastic. This implies consumers total spendings on the product is the same at each price level.
What does it mean if PED is one or more
Demand is very sensitive to the price of a product meaning demand is elastic. A percentage rise in the product would mean a more pronounced fall in demand for the product.
For example, if the price of the product rose by 10% the demand for the product would fall by 20%
What is income elasticity of demand refer to (YED)
This can be used to analyse how likely demand will be affected by changes of income.
How can YED be analysed/interpreted as
-Normal goods have a positive YED. As income rises more products are demanded at each price therefore, the product is income elastic. For example, Bread
- Normal necessities have a positive YED between 0 and one. This means demand is rising less proportionately to a change in income.
- luxury goods have a positive YED of more than one meaning demand rises more than proportionately to a change in income.
-inferior goods have a negative YED meaning that demand falls as income rises.
How does YED impact revenue
It can help a business workout how much they can increase the selling price of a product without negatively affecting the demand. Therefore, it impacts revenue for a business as they can maximise selling price and profits.
What are factors that influence PED
- necessity
- habit
- availability of substitutes
- brand loyalty
- proportion of income spent on a product
- consumer income
- time
How does necessity influence PED
If a product is essential such as bread or milk consumers will still buy similar quantities even if the price is very high. However, a reduction in price will not tend to encourage buyers to purchase more as they will already have their needs satisfied at a higher price. The more necessary a product is the more inelastic the demand is.
How does habit influence PED
Some products such as cigarettes, chocolate or alcohol cause habits meaning that a product is a necessity to a person. This means cigarette manufacturers can increase their prices and demand will stay the same. The stronger the habit the more inelastic the demand for the product is.
How does the availabilities of substitutes affect PED
If there are no alternatives to a product, a consumer is likely to buy a similar quantity of the price changes. However if there are many substitutes customers will switch to a close alternative. This impact also depends on consumer tastes, some buyers won’t see beef as a close alternative to pork but some will.
The greater availability of close substitutes causes more elastic in the demand as small price rises will encourage consumers to buy alternative products. For example petrol.
