Price Elasticity of Demand (PED)

Elasticity means

the degree of a quantitative response of demand or supply for a product TO a change in an influencing variable (e.g price or income)

Price Elasticity of Demand (PED) means

the degree of a quantitative response of demand to a change in price:

Increase in Producer Revenue will occur if..

the price decreases when PED is price elastic

Decrease in Producer Revenue will occur if..

the price decreases when PED is price inelastic

Decrease in Producer Revenue will occur if..

the price increases when PED is price elastic

Increase in Producer Revenue will occur if..

the price increases when PED is price inelastic

Price Elasticity of Demand (PED) is calculated by this formula

[(Qd2 - Qd1)/Qd1] / [(P2-P1)/P1]

substitute as a Determinant of PED

- the level of competition or choice of products will increase the PED as consumers more readily switch to buying substitutes

Time as a Determinant of PED

As time goes on and people are able to change their habits or switch to another good, PED becomes more elastic

luxury or necessity as a Determinant of PED

Luxury goods will be more price elastic due to the optional nature (compared to necessary goods which still is bought at low or high prices)

Proportion of Income as a Determinant of PED

Products that take a large percentage of one's income will be more elastic than those with a small percentage of income

PED = 0

perfectly inelastic

PED>1

price elastic of demand

PED<1

price inelastic of demand

PED=1

unitary elastic of demand