PED (Price Elasticity of Demand)

• PED Equation

  percentage change in quantity demanded divided by percentage change in price
• PED


  Price elasticity of Demand - measures the responsiveness of quantity demanded of a product to a change in its price
• PED Unitary

  1
• PED elastic


  -1 to -infinity
• PED is usually

  negative due to the inverse relationship between price and quantity demanded
• Price elastic

  1. When a change in price leads to a more than proportionate change in quantity demanded
  2. Consumers are sensitive to price changes
• Price inelastic

  1. When a change in price leads to a less than proportionate change in quantity demanded
  2. when consumers aren't sensitive to price change
• Price elastic products have a more shallow demand curve
• Price inelastic products have a more steep demand curve
• Price unitary

  change in price leads to a proportionate change in demand
• PED Determinants

  1. Proportion of Income
  2. Addictiveness
  3. Necessities
  4. Time
  5. Substitutes
• Proportion of Income

  low proportion of income- PED inelastic (consumers are not sensitive to price change)

  high proportion of income- PED elastic (consumers are sensitive to price change)
• Addictiveness

  Addictive products- PED inelastic (eg cigarettes)
• Necessities

  are inelastic because consumers need them regardless of cost (eg fuel)
• Time

  do you have time to shop around-> PED elastic

  do you not have time to shop around -> PED inelastic (eg airports)
• Substitutes


  1. If a product has substitutes it is PED elastic
  2. If a product doesn't have substitutes it is PED inelastic (eg insurance)
• Price inelastic goods suppliers have 


  increased revenue with an increase in price
• Price elastic goods suppliers have


  decreased revenue with an increased price
• Price elastic good suppliers have


  increased revenue with a decrease in price
• Price inelastic goods have 


  decreased revenue with decrease in price
• Indirect taxes


  less effective on PED inelastic goods

  More effective on PED elastic goods
• Use PED as an evaluation when discussing

  changes/effects of supply (inc. taxes and subsidies)
• Perfectly PED inelastic


  -infinity
• Perfectly PED elastic

  0
• PED Unitary supply graph is a 


  hyperbola
• PED inelastic

  -1 to infinity