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
• A number between 0 and 1

  demand is price inelastic
• 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 but <1

  income elastic, necessity
• <0 - symbol

  inferior good , supermarket basics food