PRICE ELASTICITY OF DEMAND- PeD

Formula: % Change in Qty demanded / % Change in price

Measures the responsiveness of demand for a product following a change in its own price

ALWAYS NEGATIVE

PeD= 0= Perfectly inelastic, meaning demand will not change at all when the price changes

PeD= between 0 and 1= Inelastic, meaning the change in demand is less than proportionate to the change in price

PeD= 1= Unit elastic, meaning the change in demand is the same as the change in price

PeD= >1= Elastic, meaning demand responds more than proportionately to a change in price

Where the change in demand > change in price, demand = elastic

Where the change in demand < change in price, demand = inelastic

Determinants of PeD-

The number of close substitutes for a good/ uniqueness - the more substitutes, the more elastic because consumers can easily switch their demand
Cost of switching - the more costs there is the more relatively inelastic demand is
The degree of necessity or whether it is a luxury - necessities are more inelastic whereas luxuries are elastic
The % of income allocated on spending on the good
The time period allowed following a price change - the longer consumers are given the more demand is price elastic
Whether the good is subject to habitual consumption - consumers become much less price sensitive e.g. addictive cigarettes
Peak and off-peak demand- demand is price inelastic at peak times

	Created by Alice Finbow over 7 years ago

Chapter 5