Price elasticity of demand (PED)

• If demand is perfectly elastic, any change in price will result in no change in sales volume.
• The more sensitive consumers are to price, the higher the price elasticity will be.
• What is demand?

  The ableness and willingness to buy a good / service at a given price
• What is the PASIFIC mnemonic?

  Population

  Advertising

  Substitutes

  Income

  Fashion / trends

  Interest

  Compliments
• How to calculate percentage change?

  ((New - Old) / Old) * 100
• Inelastic goods have low price elasticity as they are not very responsive to changes in price (e.g. water)
• Elastic goods have high price elasticity as they are very responsive to changes in price (e.g. petrol)
• Price Elasticity = % Change In Quantity Demanded / % Change In Price
• Price elasticity of supply measures the degree to which suppliers can increase production in response to an increase in price.
• Elasticty of supply refers to how much quantity supplied responds to a change in price or other factors that affect supply.
• A product with high price elasticity of supply means it has many substitutes available, making it easy for producers to respond to changes in price by increasing output.
• Price elasticity can also be used to measure how much revenue would increase or decrease if prices were changed by a certain amount.
• If PE is less than one, then an increase in price will lead to an increase in quantity demanded so total revenue will rise.
• If PE is greater than one, then an increase in price will lead to a fall in quantity demanded so total revenue will fall.
• If PE is greater than one, it's elastic
• If PE is less than one, it's inelastic
• Examples of Elastic products

  Sweets

  Cars
• Examples of inelastic products

  Oil / gas

  Mains water
• Relevance of elastic products to firms

  • Reduce price -> Increase revenue
  • Increase price -> Decrease revenue
• Relevance of inelastic products to firms

  • Increase price -> Increase revenue
  • Reduce price -> Decrease revenue
• Factors Influencing PED; What is the SPLAT mnemonic?

  • S: Substitutes
  • P: Percentage of income
  • L: Luxury or necessity
  • A: Addictive
  • T: Time