Price elasticity of demand

Price elasticity of demand

1. Demand+price inverse relationship

   • Price is high=demand is low
   • Price is low=demand is high

2. Percentage change= Change/Original x 100

   • PED= % Change in Quantity Demanded / % Change in price

3. Elastic (anything above 1) - makes it sensitive to a change in price

4. Unit elastic (1) - change in price will be met with an equal change in demand

5. Inelastic (below 1) - change in demand will be smaller than the change in price

6. Determinants of price elasticity

   • Necessity or luxury
     • Necessity= inelastic=not that sensitive to change in price
     • Luxury=elastic
   • Proportion of income
     • Higher the proportion of income the more price elastic the product will be
       • eg 1p sweet and a flat, 1p to 2p=100% and £100,000 to £200,000=100%
   • Brand loyalty
     • The stronger the brand loyalty the less price elastic the product will be
   • Information
     • If customers are unable to make price comparisons between different competitors products less elastic
       • eg 2 products=product A more expensive but customers dont know that B is cheaper so carry on buying product A
     • When info is poor product is price inelastic
   • Substitutes
     • The more close substitutes you have the more price elastic/ sensitive to price your product will be
     • If there are no substitutes demand will be price inelastic

7. Implications

   • If product is price elastic and you want to increase revenue, cut your prices
   • If product is price inelastic and you want to increase revenue then increase your prices

8. Graphs

   • Elastic
     • Shallow slope
   • Inelastic
     • Steep slope
       • Smaller increase in demand