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