Price elasticity of demand (Pack 5)

• What are the key factors affecting price elasticity of demand?

  • Availability of substitutes (More substitutes means more price elastic)
  • How essential the product is (Necessity would be price inelastic)
  • Proportion of your income (Small proportion means more price inelastic)
  • Time period (Short term is likely to be more price inelastic as people take time to respond)
• How is price elasticity of demand (PED) calculated?

  PED = % change in quantity demanded / % change in price
• What does a PED of -1 indicate?

  Unitary elasticity of demand; Quantity demanded is equal to the change in price
• What does a PED of 0 signify?

  Perfectly inelastic demand
• What does a PED of -2 indicate?

  Demand is elastic; For every 1% increase in price, there‘s a 2% decrease in quantity demanded.
• What does a PED of -0.2 indicate?


  Demand is inelastic; For every 1% increase in price, there’s a 0.2% decrease in quantity demanded.
• How might PED be estimated and why is this often difficult?

  Through historical data and conducting market research e.g. surveys; it's often difficult due to data being out of date and sample size may be small
• How should a business with price inelastic demand adjust prices to increase revenue?

  • Increase prices
  • Demand remains stable
  • Revenue increases
• How should a business with price elastic demand adjust prices to increase revenue?

  • Decrease prices
  • Demand increases significantly
  • Revenue increases
• What are the characteristics of relatively and perfectly price elastic demand?

  • Perfectly elastic: horizontal demand curve
  • Relatively elastic: demand curve slopes down gently
• What are the characteristics of relatively and perfectly price inelastic demand?

  • Perfectly inelastic: vertical demand curve
  • Relatively inelastic: demand curve slopes down steeply
• What is Price Elasticity of Demand (PED)?

  Responsiveness of quantity demanded for a good or service to a change in its price.