Price and Income Elasticity of Demand

• price elasticity of demand: calculates how responsive the change in quantity demanded will be to a change in price
• PED formula

  % change in quantity demanded / % change in price
• if the PED is greater than 1 then it is price elastic, meaning demand is more responsive to a change in price
• if PED is between 0 and 1 then it is price inelastic, meaning demand is less responsive to a change in price
• what are four factors affecting PED

  • brand loyalty
  • availability of substitutes
  • consumer income
  • luxury vs necessity
• if a product is price elastic, you would decrease the price to increase revenue
• if a product is price inelastic, you would increase the price to increase the revenue
• income elasticity of demand: reveals how responsive the change in quantity demanded is to a change in income and classified whether a good is a luxury, a necessity or inferior
• if YED is greater than 1 then the good is a luxury, as income rises demand rises
• if YED is between 0-1 then the good is a necessity and is not very responsive to changes in income
• if YED is less than 0 then the good is inferior, as income rises demand falls and vice versa
• formula for YED

  % change in quantity demanded / % change in income
• why is understanding the YED of a product important to a business?

  • production planning
  • product planning