Price Elasticity of Demand Flashcards
What is the Rule of Demand?
There is an inverse relationship between price and quantity demanded.
What is PED?
Measures the % or proportional change in demand following a % change in the price of the product itself.
ie. how sensitive demand is to a price change
What is the formula for PED?
% change in P
Reasons for a good being price elastic?
Large no. of subs to choose from
Luxury goods
Reasons for a good being price inelastics
Necessity
Lack of substitutes available
Factors that determine PED?
No. of available substitutes
Peak vs off peak
Time period given to adjust
Branding
% of income spent on a good
Luxury vs necessity
Cost and ease of switching between products
Habitual consumption
Product vs brand
Substitutes?
Lack of = inelastic
Lots = elastic
Peak vs off peak?
Peak = inelastic
Off peak = elastic
Time period to adjust?
Short term = inelastic
Long term = elastic
Branding?
Strong brand = more inelastic
Weak brand = more elastic
% of income spent on good?
Lower % = more inelastic
Higher percentage = more elastic
Luxury vs necessity?
Necessities = inelastic
Luxuries = elastic
Cost and ease of switching between products?
Easy and cheap = elastic
Expensive and difficult = inelastic
Habitual consumption?
Inelastic for products where people are addicted.
Product vs brand?
Product itself may be inelastic however a specific brand may be elastic.
