Price Elasticity of demand Flashcards
when price increases, quantity..
when price increases, quantity demand falls
what does the price elasticity of demand measures
price elasticity of demand measures how much demand responds to changes in price
what is the PED formula
PED= % change in demand / % change in price
does PED have positive or negative coefficient
PED has negative coefficient
PED values in relatively inelastic
relatively inelastic: between -1 and 0
PED value when unitary elastic
unitary elastic: -1
PED value when relatively elastic
relatively elastic: between -1 and infinity
PED value when perfectly elastic
perfectly elastic: - infinity, if price goes up, nobody will buy it as there’s an alternative
PED value when perfectly inelastic
perfectly inelastic: 0, no matter the price people will buy the product
percentage change formula
percentage change= new-old / old, x 100
Factors determining the PED of a product
- number of close substitutes available for consumers
- price of product in relation to total income
- cost of substituting between different products
- brand loyalty and habitual consumption
- degree of necessity/ luxury
evaluate number of close substitutes available for consumers
- the more close substitutes there are, the more price elastic the demand
evaluate price of product in relation to total income
when the % budget is high, demand is more price sensitive
evaluate cost of substituting between different products
- when substituting/ switching costs are high, demand will tend to be price inelastic
evaluate brand loyalty and habitual consumption
- high levels of brand loyalty makes demand less price elastic
- persuasive advertising makes demand price inelastic
evaluate degree of necessity/ luxury
standard assumption is that necessities have lower PED where luxuries are an optional spend
Revenue formula
Revenue - price x quantity
when a firm is selling a product with relatively inelastic PED, they should
When a firm is selling a product with relatively inelastic PED, they should increase prices in order to increase revenue
when PED is inelastic
PED is inelastic, firm should increase prices to increase revenue
when PED is elastic
PED is elastic, a firm should decrease prices to increase revenue
PED can vary along
PED varies along the demand curve
PED can vary along
PED varies along the demand curve
Income elasticity of demand, abbreviation
YED
YED shows what
YED shows how much demand changes when income changes
What does Y in YED state
Y means income
In YED is there a positive or negative coefficient
YED can be positive or negative
if positive YED and negative YED, what goods are they?
Positive YED - normal good
Negative YED - Inferior good