Chapter 8 - concepts - PED, YED, XED
Price elastic demand
A change in price results in a greater change in demand
Price inelastic demand
A change in price results in a proportionately smaller change in demand
Low negative XED
Distant complements
Low positive XED
Distant substitutes
Why is XED useful?
-allows firms to produce a pricing structure that generates most revenue -allows firms to assess the effects of a competitor reducing or increasing price
Why Is PED useful?
-predict effect of change in price on total revenue of sellers -price discrimination (eg. Peak and off rail times) -predict price volatility following changes in supply -predict effect of a change in indirect tax
Addictiveness (PED)
Addictive product = inelastic
Substitutes (PED)
Can be easily switched for another product = elastic
High negative XED
Close complements
High positive XED
Close substitutes
Why is YED useful?
Forecasts the future demand for a whole range of goods and services
luxury/necessity (PED)
Necessities = inelastic Luxuries = elastic
XED complements
Negative XED - increased price for one good will decrease demand for the other
XED substitutes
Positive XED - Increased price of one good caused increased demand for the other good
Unitary Price Elasticity of demand
Price change causes same change in quantity demanded. -1
Determinants of PED
SPLAT = Substitutes, Proportion of Income, Luxury vs Necessity, Addictiveness, Time
Time scale (PED)
Short term price change is unlikely to lead to a significant change in price, but if the price changes in the long run the opposite occurs
perfectly elastic demand curve
a horizontal line reflecting a situation in which any price increase reduces quantity demanded to zero; the elasticity has an absolute value of infinity
perfectly inelastic demand
the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero
