Price elasticity of demand (PED) Flashcards
What is price elasticity of demand?
The responsiveness of a change in demand to a change in price
What is the formula for price elasticity of demand?
% change in quantity demanded/ % change in price
What is price inelastic good?
One that has a demand that is relatively unresponsive to a change in price.
What is a unitary elastic good?
One that has a change in demand equal to the change in demand
What is a price inelastic good?
One that sees no change in demand when price changes
What is a perfectly elastic good?
One where demand falls to zero if the price changes; PED = infinity
List the six factors affecting price elasticity of demand
- Necessity
- Substitutes and complements
- Addictiveness or habitual consumption
- Proportion of income spent on the good
- Durability of the good
- Peak and off-peak demand
How does necessity affect PED?
A necassary good will have relatively inelastic demand, while luxury goods will be more elastic
How do the existence of substitutes affect PED?
If a good has several substitutes, the demand is more price elastic. Elasticity can change within markets as new products are developed. The closer and more available the substitutes are, the more elastic the demand
How does the proportion of income that is spent on a good impact its PED?
If a good takes up a small amount of income demand is likely to be relatively price inelastic. Whereas if a good takes up a large proportion of income, demand is likely to be pretty price elastic
How does the durability of a good impact its PED?
Long lasting goods have more elastic demand because consumers wait to buy another one
How does peak and off peak demand impact PED?
During peak times, demand is more price inelastic
What would be the impact of increasing the price of an inelastic good?
The quantity sold will not fall significantly, and therefore revenue will increase
What would be the impact of raising the price of an elastic good?
The quantity sold will fall, reducing total revenue
Describe how a price elastic good operates
A price change will mean a bigger change in the quantity demanded
Describe how a unitary price elastic good operates
A price change will lead to a proportional change to the quantity demanded
Describe how a price inelastic good operates
A price change causes a smaller change in the quantity demanded
What is the numerical value of a price elastic good?
Less than -1
What is the numerical value of a unitary price elastic good?
-1
What is the numerical value of a price inelastic good?
Between -1 and 0
How can we determine whether a good is price elastic?
% change in Q will be greater than the % change in P
How can we determine whether a good is unitary price elastic?
The % change in Q = the % in P
How can we determine whether a good is price inelastic?
The % change in Q will be less than the % change in P
What does PED measure?
The responsiveness of demand after a change in the good’s own price
How can substitution impact PED?
If substitution costs are high, demand will tend to be price inelastic
