PED & YED Flashcards
Define PED
PED is the relationship between price and demand and how responsive demand is to a change in price.
How is PED calculated
%change in quantity demanded / %change in price
State the different values of PED.
always ignore the minus sign
PED > 1 = elastic
PED < 1 = inelastic
PED = 1 means unitary elasticity
PED = 0 means perfectly inelastic
Explain the difference between inelastic and elastic PED
Inelastic PED is where changes in price are more responsive compared to changes in demand. However elastic PED is where changes in demand are more responsive compared to changes in price.
What factors can affect PED
Availabiltiy of substitutes
Whether the good in luxury or a neccessity
Time
Explain how availability of substitutes influences PED
If a good has many close substitiues than its likely to have elastic demand as if the price of the good increases consumers are likley to switch to the substitiues as theyre cheaper causing a greater % change in demand than in price however if the good has very few substitutes, the good will have inelastic demand as the firm can keep increasing prices as demand will chsnge by a lesser amount as there arent much alternatives
Explain on how the type of good influences PED
Necessity goods will have inelastic demand as despite how much prices increase, househoulds require these goods to survive however luxury goods arent essential and so if consumers see changes in price, its likely demand will change by a greater proportion hence having elastic demand.
How may time affect PED
In the long run consumers are more likley to be able to respond to changes in price easier compared to in the short run
Explain the relationship between PED and firms total revenue
Firms which have demand for goods that are inelastic should increase their prices as this will increase their revenue due to the increase in price being a greater % change than the % change in demand. However for firms that have elstic demand should decrease their prices as this will increase their revenue as the % increase in demand will be greater than the % fall in price
Define income elasticity of demand
YED
YED looks at the relationship between income and demand and how responsive demand is to a change in income
How can YED be calculated
% change in demand / % change in income
Explain the relationship between YED and inferior goods
Inferior goods have a negative income elasticity of demand as when household income rises, demand for inferior goods decreases.
Explain the relationship between normal and luxury goods and YED
They have a positive YED, when income rises demand fro luxury and normal goods increases.
