PED Flashcards
What is PED?
The responsiveness of QD of a good to a change in its price
What is the formula of PED?
% change in QD / % change in price
Why is PED negative?
Because the QD is inversely related to price
What is inelastic demand?
When QD is not responsive to price changes and when the value of PED is between 0 and -1
What is elastic demand?
When quantity demanded is very responsive to price changes and when the value of PED is between -1 and -infinity
What unit demand?
When PED = -1
What is perfectly elastic demand?
When PED = -infinity
What is perfectly inelastic demand?
When PED = 0
What happens to TR when PED is elastic?
a rise in price leads to a more than proportionate fall in QD, so TR falls
a fall in price leads to a more than proportionate rise in QD, so TR rises
What happens to TR when PED is inelastic?
a rise in price leads to a less than proportionate fall in QD, so TR rises
a fall in price leads to a less than proportionate rise in QD, so TR falls
What happens to TR when PED is unitary?
TR will not change when price changes
What are factors influencing PED?
- Availability of close substitutes
- Cost of switching suppliers
- Broadness of product definition
- Degree of necessity
- Time frame when making choice
- Brand loyalty
- % of income spent on product
- Habitual demand
What are the uses of PED?
- Determination of pricing policy / impact on revenue
- Indication of competition faced (number/closeness of substitutes)
- Price setting in price discrimination
- Government decision on which goods to tax indirectly
