Price Elasticity Of Demand - Economics Unit 1

PED - Price Elasticity of Demand

The responsiveness in quantity demanded for a good following a change in price of the good.

PED = % change in quantity demanded/ % change in price.

If the answer is between +/- 0-1 then the good is said to be inelastic. Examples of inelastic goods include cigarettes, petrol etc. (will go into detail why)

If the answer if +/- 1+ then the good is said to be elastic. Examples of elastic goods include sports cars.

If the PED = 1 then it is said to have unitary elasticity of demand, this means that a 10% change in price will cause a 10% change in demand.

If PED = 0 the good is perfectly inelastic, the demand curve would be horizontal.

If PED = infinity the good is perfectly elastic and the demand curve is vertical.
Factors that affect Price Elasticity Of Demand:

• Whether the good is a necessity or a luxury. If it is a necessary good then PED will be inelastic as a consumer is willing to pay whatever price for it. If it is a luxury then its PED will be elastic because they don't need it
• Availability of substitutes - If there are no substitutes, there is no competition therefore it is inelastic. If there are substitutes then its is elastic
• Addictiveness makes a good inelastic as thy will pay whatever for it. ie. Cigarettes
• Brand Loyalty
• Time frame - if you need a good today then you are more to pay whatever for it so it is inelastic
• % of income spent on good - if its a small percent of your income then it will be inelastic.

If PED is inelastic and and the price increases then total revenue (PxQ) will increase as you are selling at a higher price

If PED is elastic and the price decreases then total revenue (PxQ) increases as selling more at a lower price