Price Elasticity of Demand

• The determinants of price elasticity of demand are:

  1. The availability of substitutes of a similar quality and price.
  2. The proportion of income spent on the product.
  3. Whether the product is a necessity or a luxury.
  4. Whether the product is addictive or not.
  5. Whether the purchase can be postponed or not.
  6. How the market is defined.
  7. The time period under consideration.
• Price elasticity of demand is calculated by dividing percentage change in quantity demanded by percentage change in price, with an absolute value greater than one indicating high sensitivity to changes in price.
• Inelastic goods have low price elasticity, while elastic goods have high price elasticity.
• Inelastic goods have low price elasticity of demand (PED) because they cannot easily be replaced by other products due to lack of close substitutes, making consumers less sensitive to price changes.
• Essential goods such as food, clothing, housing, and transportation tend to have lower PED values since people need them regardless of their prices.
• Examples of inelastic goods include petrol/gasoline, water, electricity, rent, and medical care.
• If there are no close substitutes available, then the price elasticity will be lower as consumers cannot easily switch to other products.
• When a good is considered essential, such as food or medicine, consumers may still need to buy it even if prices increase significantly, resulting in lower price elasticity.
• Elastic goods have high price elasticity of demand (PED), meaning that small changes in price lead to large changes in quantity demanded as there are many good substitutes available.
• Examples of elastic goods include soft drinks, clothing, cars, and holidays.
• Luxury goods like expensive cars, jewelry, and vacations often have higher PED values since buyers may reduce consumption if prices rise significantly.
• When a product has few alternatives, its price elasticity tends to be lower.