Price elasticity of demand

• Elasticity measures the responsiveness of demand to a change in relevant variable - such as price income
• Price elasticity of demand measures the extent to which the quantity of a product demanded is affected by a change in price the formula is:

  PED = % change in quantity demanded / % change in price
• If value of PED is >1 it is elastic

  If value of PED is <1 it is inelastic

  If value of PED = 1 its perfectly elastic
• What factors go into PED?

  If it is a superior or inferior good

  If its a luxury

  Brand loyalty

  Habit

  Stage in product lifestyle

  Time
• Income elasticity of demand measures the extent to which the quantity of a product demanded is affected by a change in income
• The formula for income elasticity of demand is:

  YED = % change in demand / % change in income
• If value of YED > 1 its a luxury/superior good

  If value of 1 < YED > 0 its a necessity

  If value of YED < 1 its an inferior good
• What are the limitations of calculating elasticities?

  Can be difficult to get reliable data

  Other factors affect demand

  Many markets subject to rapid technological change

  Competitors will react
• What are the key points from elastics?

  Elasticities provide useful insights for management in decision making

  Firms tend to like to have products with inelastic demand

  Building string brands and products USPs is a good strategy for making more price inelastic
• Elastic = very responsive to change

  Inelastic = not responsive to change