1.2.4 PED + YED

• PED = % change in quantity demanded


  % change in price
• What does PED measure?

  Responsiveness of demand to change in price
• Price inelastic


  Demand for product is not responsive to change in price
• Price elastic


  Demand is responsive to change in price
• PED is always a negative number.
• Products with inelastic demand have few substitutes and are necessities
• PED: A number between 0 and 1 


  demand is price inelastic
• PED: Number between 1 and infinity


  demand is price elastic
• 3 factors that affect PED

  availability of substitutes, frequency of purchase and the price of product
• If PED is inelastic then a rise in price increases total revenue and a fall in price reduces total revenue; if PED is elastic then a rise in price reduces total revenue and a fall in price increases total revenue.
• How can PED help the implications of pricing?

  lowering pricing (competitive) where PED can be more elastic or setting a high price (skimming) where PED is inelastic
• Elastic products have substitues
• Inelastic are necessities
• YED = % change in quantity demanded


  % change in income
• YED measures responsiveness of demand to change income. A positive number means the product is normal and negative means it is inferior.
• Factors affecting YED

  whether product is luxury, necessity or inferior good

  expectations of changes in income

  loss of job, recession, economic growth
• Percentage change = (new value - old value) / old value x 100
• > +1


  income elastic, luxury goods
• 0 to 1


  income elastic, necessity
• Less than 0 - decimal number


  inferior good , supermarket basics food
• If the product is a whole number (1), it is product elastic and will experience large shifts in demand depending on price
• If the product is a decimal number, 0.1, it will experience none or low shifts in demand depending on price
• YED

  More than 1 - luxury good, income elastic

  Between 0 and 1 - necessity, income elastic

  Less than 0 -inferior good, basic food
• A YED value > 1 indicates that the product or service is income elastic, meaning that the demand for it is very responsive to changes in income.
• A YED value < 1 indicates that the product or service is income inelastic, meaning that the demand for it is relatively unresponsive to changes in income.
• Factors affecting price elasticity of demand

  • availability of substitute goods
  • consumer income
  • luxury/necessity
  • brand loyalty