elasticity of demand

• Elasticity of Demand definition: Measures responsiveness of demand for a good/service to a change in price
• Formula: Percentage change in elasticity demand

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  Percentage change in price
• Why is price elasticity of demand so important?

  Shows how sensitive demand for the good/service is to a change in price
• Price elastic definition

  Sensitive to price
• Price elastic

  This usually happens in perfect markets where the products are undifferentiated (similar to each other)
• if price goes up = demand falls
• If price falls = A rise in demand
• Price inelastic definition

  Not sensitive to price
• If price falls = Demand stays the same
• If price rises = Demand stays the same
• When does inelastic price elasticity of demand happen?

  1. Low levels of competition
  2. Few substitute products
  3. Goods are necessities
• Factors which affect price elasticity of demand

  1. Customer knowledge: If they are more aware of other products in the market , they will likely switch to them
• Factors which affect price elasticity of demand?

  2. Availability of substitutes: If there is little/no competition , it becomes very hard to switch
• Factors which affect price elasticity of demand?

  3. Brand loyalty: customers who are loyal end up staying with the same product regardless of the price increasing
• Factors which affect price elasticity of demand

  Ability to switch to other products: if the product is very different from other competitors , it will make it harder to switch in response to a price change.
• Factors which affect price elasticity of demand

  Uniqueness of the product: many companies make it difficult to change their product and this reduces elasticity
• Income elasticity of demand definition: responsiveness of demand to changes of income
• negative = a rise of income will cause a fall in demand
• income elasticity of demand formula:

  
  

  Percentage change in demand

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  percentage change in income
• Normal goods - When customers income increase the demand for these products rise . (These are everyday products) e.g. cars
• Luxury goods - when customer's income rises, they spend more on luxury items. E.g. champagne
• inferior goods - when customer's income increases, they buy less of these products as they can afford better quality alternatives. E.g. potatoes