Price Elasticity Of Demand

• Price Elasticity of Demand 


  the responsiveness of a change in demand to a change in price
• PED equation


  %change in quantity/ % change in price
• Elastic goods


  very responsive to a change in price. the change in price leads to an even bigger change in demand. the numerical measurement can be from 1 to infinity.
• Inelastic good


  has a demand that is relatively unresponsive to a change in price. its numerical measurement can be from 0 to 1
• Unitary elastic good 


  has a change in demand which is equal to the change in price. it's numerical measurement is 1.
• Perfectly inelastic good


  has a demand which doesn't change when price changes. its numerical measurement is 0.
• Perfectly elastic good


  has a demand which falls to zero when the price changes. it's numerical measurement is infinity.
• Factors that influence PED

  necessity, substitutes, addiction, proportion of income spent on the good, the durability of the good, and peak and off-peak demand
• Necessity


  A necessary good, such as bread, will have a relatively inelastic demand. even if the price increases significantly, consumers will still demand bread because they need it. Luxury goods, such as holidays, are more elastic. If the price of flights increases, the demand is likely to fall significantly
• Substitutes


  If the good has several substitutes, such as Android phones instead of iPhones, then the demand is more price elastic. The elasticity can also change within markets. For example, the market for bread is less elastic than the market for white bread. This is because there are fewer substitutes for bread in general, but there are several substitutes for white bread. Hence, white bread is more price elastic. The closer and more available the substitutes are, the more price elastic the demand.
• Elasticity also changes in the long and short run. In the long run, consumers have time to respond and find a substitute, so demand becomes more price elastic. In the short run, consumers do not have this time, so demand is more inelastic.
• Addiction


  The demand for goods such as cigarettes is not sensitive to a change in price because consumers become addicted to them, and therefore continue demanding the cigarettes, even if the price increases.
• Proportion of income spent on the good

  If the good only takes up a small proportion of income, such as a magazine which increases in price, demand is likely to be price inelastic. If the good takes up a significant proportion of income, such as a car which increases in price, the demand is likely to be more price elastic.
• Durability


  A good which lasts a long time, such a washing machine, has a more elastic demand because consumers wait to buy another one.
• peak and off-peak demand


  During peak times, such as 9am and 5pm for trains, the demand for tickets is more price inelastic.
• The burden of an indirect tax will fall differently on consumers and firms, depending on if the good has an elastic or inelastic demand. that taxes shift the supply curve, not the demand curve.
• If a firm sells a good with an inelastic demand, they are likely to put most of the tax burden on the consumer, because they know a price increase will not cause demand to fall significantly. An increase in tax will decrease supply from S1 to S2, which increases price from P1 to P2, and therefore demand contracts from Q1 to Q2. This is most effective for raising government revenue.

  
• If a firm sells a good with an elastic demand, they are likely to take most of the tax burden upon themselves. This is because they know if the price of the good increases, demand is likely to fall, which will lower their overall revenue. This is not as effective for raising government revenue, but if a government wants to reduce the demand of a particular good, it is effective. Demand will fall significantly, from Q1 to Q2.

  
• Revenue


  Total revenue is equal to average price times quantity sold.

  TR= P x Q

  If a good has an inelastic demand, the firm can raise its price, and quantity sold will not fall significantly. This will increase total revenue. If a good has an elastic demand and the firm raises its price, quantity sold will fall. This will reduce total revenue.
• other than changing prices, detail how else a firm can increase their revenue

  1. brand image - marketing & advertising
  2. making products more widely available - more shops & websites
  3. new product range