Price elasticity of demand Flashcards
Define price elasticity of demand
The responsiveness of demand to change in price.
PED can be either elastic or inelastic and PED values are always negative/minus.
What is the formula for PED?
percentage change in quantity demanded
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percentage change in price
What value means a product has an elastic PED?
When the value is more than 1 eg -1.7
What value means a product has an inelastic PED?
Values between 0 and 1 eg -0.7
What is does an elastic PED mean?
Demand for the product is sensitive to change in price.
What does an inelastic PED mean?
Demand for a product is not sensitive to change in price.
What factors influence price elasticity of demand?
Availability of substitutes Frequency of purchase Necessities Luxury goods Relative price/expense of product
Explain how availability of substitutes impacts price elasticity of demand.
When a market has a large number of available substitutes, the demand will be more sensitive to price. Lots of substitutes means the product has a more elastic price.
Explain how frequency of purchase impacts price elasticity of demand.
Products that are bought frequently tend to be very elastic. Frequent purchases mean consumers are sensitive to changes in price so products are more price elastic.
Explain how whether or not a product is a necessity impacts price elasticity of demand.
Necessities have lower price elasticises as consumers must purchase the product despite price changes
Explain how whether or not a product is a luxury good impacts price elasticity of demand.
Luxury goods tend to be very expensive, these are a very large percentage of consumer’s incomes
The high cost will cause consumers to pay attention to the price meaning it is more price elastic.
Explain how relative price/ expense of product impacts price elasticity of demand.
Expensive products tend to be elastic (the more expensive the product the more careful consumers are with price). Exception is heavily branded products or those aimed at the super rich e.g. Rolex
Inexpensive products tend to be inelastic (cheaper prices will have very small price increases and so consumers will not be so sensitive to price changes) Exception is fast moving consumer goods where shoppers switch to a substitute e.g. cabbage if parsnips are too expensive
Explain how time impacts price elasticity of demand.
Price elasticity of demand tends to fall the longer the time period. This is mainly because consumers and businesses are more likely to turn to substitutes in the long term.
Explain how branding impacts price elasticity of demand.
The stronger the branding, the less substitutes are acceptable to customers.
Explain how proportion of income spent on a product impacts price elasticity of demand.
For inexpensive products, where the proportion of a consumer’s income spent on the transaction is very small, demand is likely to be price inelastic.
