Price Elasticity Of Demand

• Determinants of PED (SPLAT)

  1. Substitutes: number of and closeness to
  2. Percentage: of consumer's income
  3. Luxury or necessity: is it either or neither?
  4. Addictiveness: how addictive is the product?
  5. Time: to adjust to new prices
• Price elasticity of demand (PED)


  The responsiveness of quantity demanded to a change in price
• When a product is price elastic, a change in price leads to a large change in quantity demanded.
• When a product is price inelastic, a change in price leads to a little change in quantity demanded.
• Demand is price elastic if the percentage fall in quantity demanded is greater than the percentage rise in price.
• Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

  
• With price inelastic demand, firms can increase price for more revenue.
• With price elastic demand, firms can decrease price for more revenue.