Elasticity- price elasticity of demand
formula for calculating PED
%change in QD / %change in price
factors affecting PED
>substitutes >nature of the good- neccesitites vs luxuries >size of purchase (relative to consumer's budget) -
elastic
many substitutes or luxury
inelastic
necessity
if PED is more than 1..
price is elastic. the demand responds more than proportionately to a change in price. line will not be steep at all. a rise in market price will lead to a decrease in total revenue.
if PED is 0-1...
price is inelastic. a change in price will hardly effect the QD. the line will be a very steep gradient to the left. a rise in market price will lead to an increase in total revenue.
if PED = 0...
price is perfectly inelastic. a change in price won't effect the QD. The demand curve will be vertical. A rise in market price will lead to an increase in total revenue. These products have no subsitutes
price elasticity of demand measures...
the responsiveness of a change of price and the quantity demanded.