Price Elasticity of Demand 1.2.4 Flashcards
what does elasticity measure
the responsiveness of demand to a change in a relevant variable like income or price
what does price elasticity of demand measure
the extent to which the a product ‘s demand is affected by a change in price
what is the PED calculation
% change in quantity demanded / % change in price
how to interpret a PED value that is over 1
it is price elastic and the change is demand will be larger
how to interpret a PED value that is exactly 1
change in demand = change in price
how to interpret a PED value that is lower than 1
it is price inelastic and the change in demand will be smaller
how will brand strength effect PED
products with strong brand loyalty and reputation tend to be price inelastic
how will if the product is a necessity effect PED
the more necessary a product is, demand tends to be more inelastic
how will the habit of a product effect PED
products that are demanded because of habits are usually inelastic
how will the availability of a product effect PED
products which have lots of alternatives are elastic
what does income elasticity of demand measure
the extent to which the demand of a product is affected due to a change in income
how to calculate income elasticity of demand
% change in quantity demanded / % change in income
how does changing consumer incomes effect normal products
a rise in consumer income will result in a rise of demand
how does changing consumer incomes effect inferior goods
as income rises demand falls (consumers switch to better alternatives)
limitations of using elasticities
- it can be difficult to get reliable data on how demand changes due to price
- other external factors affect demand
- some markets are subjective to rapid technological change (makes previous data less reliable)
- Competitors will react
