Factors influencing the PED

Question 1

Necessity

Answer 1

A necessary good, e.g. bread or electricity, will have relatively inelastic demand. If prices increase, consumers will still demand bread or electricity.

Question 2

Luxury

Answer 2

Luxury goods, such as holidays, are more elastic. If prices increases, demand will fall significantly.

Question 3

Substitutes

Answer 3

A good with multiple substitutes e.g. iphones and androids, demand is likely to be price elastic.

Question 4

Addiction or habitual consumption

Answer 4

The demand for goods such as cigarettes is not sensitive to a change in price because consumers become addicted to them, and therefore continue to demand cigarettes even if the price changes.

Question 5

Proportion of income spent on the good

Answer 5

A good that only takes up a small proportion of income, such as an apple which increases in price from 20p - 40p, demand is likely to be relatively price inelastic. If a good takes up a significant proportion of income, e.g. a car which increases in price from £15,000 - £20000, demand is likely to be more elastic.