Price Elasticity of Demand

A measure of the sensitivity of quantity demanded to a change in the price of a good or service
PED
1. Always negative
  1. Due to the relationship between QD and Price
  2. Ignore the minus sign to interpret
Types of PED
1. > 1
  1. Good is very responsive
    1. consumers respond to a change in price
  2. Very elastic
2. < 1
  1. Not very responsive
    1. consumers don't respond to a change in price
  2. inelastic
3. = 1
  1. Unit elasticity
    1. % change in price and QD are the same
4. = 0
  1. Perfectly inelastic
  2. Not responsive
    1. A change in price has no impact on QD
5. Infinite
  1. Very responsive
    1. if price increases, demand disappears
Types of goods
1. Inelastic
  1. Habit forming goods
    1. cigarettes
  2. Nescessities
2. elastic
  1. any good with a substitute
3. Unit elasticity
  1. A theory
  2. Very unlikely
Total Revenue
1. All money recieved
2. Price X Quantity
3. If a good is elastic
  1. A fall in price causes
    1. A large rise in QD
      1. Total revenue increases
4. Rectangle under graph
5. If good is inelastic
  1. A fall in price causes
    1. a proportionally smaller increase to PED
      1. Total revenue decreases
Influences of PED
1. Luxury and necessity goods
2. Availability of Subsitutes
  1. if substitutes are available
    1. strong incentive to shift consumption
      1. when price rises
    2. product will be elastic
3. Proportion of income spent on product
  1. if small, then PED will be inelastic
    1. e.g. salt
  2. If large, then PED will be elastic
4. Nature of product
  1. Habit forming goods
    1. If it is addictive
      1. will be inelastic
      2. e.g. alcohol
5. Durability of product
  1. if it is long-lasting
    1. elastic
      1. can post-pone purchases
    2. Furniture
  2. if it needs to be replaces regularly
    1. inelastic
    2. e.g. milk
6. Length of time under consideration
  1. takes time for consumers to adjust sending patterns
    1. demand is more price elastic in the long run
7. Breadth of definition of a product
  1. If a product is broadly defined
    1. e.g. fruit
    2. it is likely to be price inelastic
    3. although if it is specific
      1. apples
      2. it is likely to be more elastic

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PED (image/png)

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Price Elasticity of Demand

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