1.2.4 price elasticity of demand

• elasticity is the responsiveness of demand to a change in a relevant variable, such as price or income
• price elasticity of demand (PED) measures the extent to which the quantity of a product demanded is affected by a change in price
• PED = % change in quantity demanded / % change in price
• the PED value is always negative due to the inverse relationship between price and quantity

  • if price goes up, the quantity demanded goes down
  • if price goes down, quantity demanded goes up
• numerical value: >1

  type of good: elastic

  explanation:

  • demand is more responsive to the change in price
  • % change in QD is more than the proportional to % change in p
• numerical value: between 0 and 1

  type of good: inelastic

  explanation:

  • demand is less responsive to change in price
  • % change in QD is less proportional than % change in price
• why PED matters


  • if PED is >1 (price elastic) then a change in price will cause a larger change in demand

  overall revenues would increase with a price

  overall revenues would fall with a price increase

  • The opposite is the case if PED <1 (price inelastic)
• factors influencing PED

  • brand strength - products with strong brand loyalty and reputation tend to be price elastic
  • necessity - the more necessary a product, the more demand tends to be inelastic
  • habit - products that are demanded and consumed as a matter of habit tend to be price inelastic
  • availability of substitutes - demand of products that have lots of alternatives (substitutes) tends to be price elastic
  • time - in the short run, price changes tend to have less impact on demand than over longer periods