Price elasticity of Demand
How does the number of close substitutes in a market affect price elasticity of demand?
The more substitutes, the more elastic the market is because consumers find it easier to switch to other goods.
How does the price of switching to different products affect elasticity?
In industries where costs are incurred to consumers to change products, like in the phone industry where customers must pay to break contracts, demand isn't very elastic as it's hard for consumers to stop using the goods.
How does the proportion of income the consumer spends on the good affect its elasticity?
A product which uses more of a consumer's income is more elastic to price changes because the consumer is more affected by the price change than with a less important good.
Why is the response to price changes more elastic as time progresses?
As time goes on, responses become more elastic as consumers have more time to find cheaper alternative goods.
Why are types of goods often inelastic but certain brands are elastic to price changes?
Consumer goods like meat and petrol are inelastic as they are necessities. Certain brands are usually elastic as consumers easily change to cheaper brands following price increases with ease and no prices incurred by the change.
Why are prices more elastic for products serving peoples habits?
Consumers have inelastic responses to products they use habitually, like cigarettes.
How does elasticity differ between luxuries and necessities?
Demand is inelastic with necessities as consumers cannot live without them whereas demand is changeable when the prices of luxuries rise (highly elastic).
Why are package holidays much more expensive during school holidays than any other time?
Demand pushes prices up yet the response of price increases is inelastic because so many consumers want to buy holidays. Therefore, companies are able to push prices up in order to increase revenue.
What do the different values for PED mean?
If Ped = 0 demand is perfectly inelastic - demand does not change at all when the price changes - the demand curve will be vertical. If Ped is between 0 and 1, then demand is inelastic. If Ped = 1 then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending the same at each price level. If Ped > 1, then demand is elastic. For example if a 10% increase in the price of a good leads to a 30% drop in demand. The price elasticity of demand for this price change is -3
How can we calculate the price elasticity of demand?
Percentage change in quantity demanded divided by the percentage change in price
What is price elasticity of demand?
The responsiveness of demand to a change in market price of a certain good.
