PED & YED

PED & YED

1. Elasticity of demand

   • PED = extent to which demand is affected by price
   • YED = demand affected by consumer income
   • %change in demand/ %change in factor

2. Effects of PED

   • Greater than 1 = elastic
     • Consumers sensitive
     • Luxury
     • Substitutes
     • Decrease price = increased revenue
     • Increase price = decreased revenue
   • Less than 1 = inelastic
     • Insensitive
     • Necessities
     • No substitute
     • Habitual
     • Increase price = increase revenue
     • Decrease price = decrease revenue

3. Influences on PED

   • Necessity
   • Habitual
   • % of consumers income spent on good
   • Cost of switching
   • Substitutes available
   • Brand loyalty

4. YED

   • Luxury
     • Greater than 1
     • Strong positive
     • Demand rises more than proportionate to change in income
   • Necessities
     • 0-1 weak positive
     • Not much change
   • Inferior
     • Negative
     • Demand falls as income rises
   • Normal
     • Positive
     • More demanded at each price
     • Outward shift of curve

5. Value

   • Decide strategy
   • Helps forecasting
   • Helps set targets
   • Aid financial planning

6. Limitations

   • Assumes all other things are equal
     • Changing trends
     • New competitors
     • Tech change
     • Image change
   • Market research may be unreliable
   • Price change may spark reactions from competitors