PED

• What does it mean if a good is elastic?

  Percentage change in demand will be greater than change in price
• What does it mean if a good is inelastic?

  Percentage change in price will be greater than change in demand
• What are price elastic goods?

  They're very responsive to price changes

  • Many substitutes (undifferentiated)
  • Products are widely available
• What are price inelastic goods?

  Less responsive to price changes

  • Highly branded
  • Innovative
  • In short supply
  • Few substitutes
  • Habit forming
• What does PED stand for?

  Price Elasticity of Demand
• What is the formula for PED?

  Percentage change in Quantity Demanded / Percentage change in price
• What does it mean if the value of a good is 0?

  Perfectly inelastic: Price has no effect on demand at all
• What does it mean if the value of a good is 0<1?

  Inelastic: Price has a small effect on demand
• What does it mean if the value of a good is 1?

  Unitary: Changes are the same
• What does it mean if the value of a good is 1<infinity?

  Elastic: Demand is very sensitive to price
• What does it mean if the value of a good is Infinity?

  Perfectly elastic: Any increase in price, kills demand
• Why is PED important for a business?

  They can use these estimated to predict:

  • The effect of a change in price to quantity demanded and total revenue
  • The likely price volatility in a market following unexpected changes in supply
  • The effect of a change in indirect tax on price and quantity demanded <- whether they are able to pass it on to a consumer or not
• What are the factors that determine PED?

  Number of close substitutes for a good and the uniqueness of the product in the market

  Degree of necessity of consumption

  The percentage of consumer's income allocated to consumer's spending on the good

  The time period allowed during a price change

  Whether demand causes habitual consumption

  Peak and off-peak demand

  The breadth of definition of a good or a service