Chap8

• Price Elasticity of Demand (PED)


  The responsiveness of demand to a change in price

  
• Calculating PED


  1. %ΔQ / %ΔP

  2. ΔQ * P / ΔP * Q
• Demand curve


  • Steep - inelastic demand
  • Flatter - elastic demand (more responsive to price change)

  
• Inelastic demand


  Change in price results in a proportionately smaller change in the quantity demanded

  
• Elastic demand


  Change in price results in a greater change in the quantity demanded
• If PED = 0, demand is perfectly inelastic - demand does not change when the price changes - the demand curve is vertical

  
• If PED is between 0 and 1, then demand is inelastic
• If PED = 1, then demand has unitary elasticity - a 15% rise in price would lead to a 15% contraction in demand leaving total spending the same at each price level
• If PED > 1, then demand is elastic - it responds more than proportionately to a change in price
• If PED = ∞, then demand is perfectly elastic - a fall in price would lead to an infinite increase in demand whilst a rise in price would lead to zero demand

  
• Unitary Elastic Demand (PED = 1)


  A change in price will have a proportionate change in demand, meaning total revenue will be exactly the same at each price level
• When there is a price change

  There will be a change in quantity demanded and therefore a change in total revenue
• Inelastic Demand (PED < 1)


  • A rise in market price will lead to an increase in total revenue for the seller of the product
• Elastic Demand (PED > 1)

  • The total revenue will increase if the seller reduces their prices, as the change in quantity demanded will be proportionately higher than the reduction in price

  
• Factors affecting PED


  • Availability of substitutes
  • Degree of necessity
  • Proportion of income spent on a product
  • Time
• Close substitutes -> elastic demand, Few/no close substitutes -> inelastic demand
• Essential goods (necessities or habit forming) -> inelastic demand, Luxury goods -> elastic demand
• Large proportion of income spent on a product -> elastic demand
• Short term (takes time to adjust) -> inelastic demand