1.2.3 Price Elasticity of Demand

• What does Price Elasticity of Demand (PED) measure?

  Responsiveness of quantity demanded
• The formula for calculating PED is \frac{\% \text{ change \in quantity demanded}}{\% \text{ change \in price}}
• Elastic demand occurs when PED is greater than 1.
• Match the PED value with its demand type and example:

  PED > 1 ↔️ Elastic demand, Airline tickets

  PED < 1 ↔️ Inelastic demand, Prescription drugs

  PED = 1 ↔️ Unit elastic demand, Basic commodities
• Inelastic demand occurs when PED is less than 1
• Unit elastic demand means the percentage change in quantity demanded equals the percentage change in price.
• Classify the following items based on their PED values:

  1️⃣ Airline tickets (Elastic)

  2️⃣ Prescription drugs (Inelastic)

  3️⃣ Basic commodities (Unit elastic)
• What happens to quantity demanded when the price of a product with elastic demand increases?

  Decreases significantly
• Inelastic demand means a significant price change results in a minor change in quantity demanded.
• Airline tickets are an example of a product with elastic demand.
• Prescription drugs are an example of a product with inelastic demand.
• What is the PED value for basic commodities that have unit elastic demand?

  1
• Elastic demand means a small price change leads to a large change in quantity demanded.
• Inelastic demand means a significant price change leads to a minor change in quantity demanded.
• What does a PED value less than 1 indicate?

  Inelastic demand
• The Price Elasticity of Demand (PED) is calculated as \frac{\% \text{ change \in quantity demanded}}{\% \text{ change \in price}}
• A PED value greater than 1 indicates elastic demand.
• What type of demand occurs when the quantity demanded changes proportionally with the price?

  Unit elastic
• Unit elastic demand occurs when the PED value is equal to 1
• Match the PED value with the type of demand:

  > 1 ↔️ Elastic

  < 1 ↔️ Inelastic

  = 1 ↔️ Unit Elastic
• What is one factor that affects the elasticity of demand?

  Availability of substitutes
• Necessities have inelastic demand, while luxuries have elastic demand.
• Demand becomes more elastic over longer time periods.
• Why is PED crucial for businesses?

  Informs pricing strategies
• If lowering prices by 10% leads to a 20% increase in sales, revenue increases by 8%.
• PED helps businesses decide whether to compete on price or quality.
• What does a PED value of 1 indicate?

  Proportional change
• Match the PED value with its corresponding demand type and example:

  > 1 ↔️ Elastic, Luxury Cars

  < 1 ↔️ Inelastic, Necessities

  = 1 ↔️ Unit Elastic, Basic Goods
• Understanding PED is critical for businesses in pricing strategies and revenue management.
• What is the first step in calculating PED?

  Find % change in quantity
• If the price of a product increases by 10% and the quantity demanded decreases by 20%, the PED value is -2.
• What does elastic demand imply about consumers?

  Sensitive to price changes
• Inelastic demand means consumers are less responsive to price changes.
• Match the PED value with its description and example:

  > 1 ↔️ Elastic, Designer Clothing

  < 1 ↔️ Inelastic, Medications

  = 1 ↔️ Unit Elastic, Basic Commodities
• What is the definition of unit elastic demand (PED = 1)?

  Proportional change in demand
• A small change in price for elastic demand (PED > 1) leads to a significant change in quantity demanded.
• What characterizes inelastic demand (PED < 1)?

  Small change in demand
• Match the PED value with its corresponding demand type:

  PED > 1 ↔️ Elastic Demand

  PED < 1 ↔️ Inelastic Demand

  PED = 1 ↔️ Unit Elastic Demand
• Factors affecting PED in order of influence on demand elasticity:

  1️⃣ Availability of Substitutes

  2️⃣ Necessity vs. Luxury

  3️⃣ Proportion of Income Spent

  4️⃣ Time Period

  5️⃣ Brand Loyalty
• More substitutes for a product make its demand more elastic.