price elasticity of demand Flashcards
define price elasticity of demand
Price elasticity of demand (PED) is the responsiveness of demand to a change in price.
equation PED
PED =
% CHANGE IN QUANTITY DEMANDED
—————————————–
% CHANGE IN PRICE
factors influencing PED
- Degree of product differentiation: no difference = easy to switch therefore elastic demand
- Number of substitutes: more substitutes = more elastic
- Luxury or necessity? luxury = more elastic, necessity = more inelastic
- Cost of switching between products: higher cost = more inelastic demand
- brand strength = good = price inelastic
examples of elastic products
luxury goods
examples of inelastic products
necessities
what is the range of inelastic products?
less than 1
what is the range of elastic products?
more than 1
ELASTIC; price increase
This leads to a bigger percentage decrease in the quantity demanded.
- Revenues fall
ELASTIC; price decrease
This leads to a bigger percentage increase in the quantity demanded.
- Revenues rise
INELASTIC; price increase
This leads to a smaller percentage decrease in quantity demanded.
- Revenues rise
INELASTIC; price decrease
This leads to a smaller percentage increase in the quantity demanded.
- Revenues fall
inferior good
an item that becomes less desirable as the income of consumers increases
- e.g. instant noodles, pizza,
-. As incomes rise, one purchases more expensive, appealing or nutritious foods.