Unit 1: PED

• What is PED?

  Measure of the responsiveness of QD given a change in price
• What does PED explain?

  How much price or demand would increase
• PED formula

  The division between the percent change in QD and percent change in price
• Why is PED always negative?

  Due to the inverse relationship between qd and price, one of them will always be positive or negative
• Demand is price elastic

  Demand is higher than price/ any change in price results in a bigger change in QD
• Demand is price inelastic


  Demand is slightly higher than price/ any change in price results in a less proportionate change in QD
• Demand is perfectly price inelastic


  Demand remains the same/ any change in price will not change QD
• Demand is perfectly price elastic

  Any change in price results in QD falling to 0
• Demand is unitary elastic

  Demand changes as price changes/ Any change in price is equal to a change in QD
• What are the two extreme demand elasticity scenarios?

  Demand is perfectly inelastic and
• Difference between how price elasticity and inelasticity are presented on a graph

  Inelasticity is a vertical line, Elasticity is a horizontal line
• Acronym to determine whether demand is price elastic or inelastic

  S(substitutes) P(Percentage of income) L(Luxury or necessity)A(whether the good is addictive or not)) T(Time period)
• How elasticity relates to substitutes


  More substitutes results in price elasticity and less substitutes results in price inelasticity
• How elasticity relates to percentage of income

  Higher percentage results in price elasticity and lower percentage results in price inelasticity
• How does addictiveness relate to elasticity


  More addictive the more elastic, the less addictive the more inelastic
• How do luxuries relate to elasticity?


  Luxuries are price elastic and necessities are price inelastic
• How does time relate to elasticity?

  Long run demand is elastic, short-run demand is inelastic
• How do firms use PED?

  To determine pricing strategies that will increase their total revenue
• Elastic Only Irritates Skin

  Elastic Opposite Inelastic Same
• What happens when demand is price inelastic (revenue)

  Whatever is done to inelasticity is also done to revenue
• What happens when Demand is price elastic?

  Whatever is done to elasticity the opposite is done to revenue
• Solution for when demand is price elastic

  Reducing the price to increase total revenue
• Solution for when demand is price inelastic

  Price should be increased to increase TR
• Why is price elasticity of demand important?


  This metric helps understand how sensitive consumers are to price changes for a particular product.
• What factors influence price elasticity of demand?

  Factors include availability of substitutes, necessity of the good, time period, and proportion of income spent.
• What are the key factors that affect price elasticity of demand?

  - Availability of substitutes: More substitutes lead to more elastic demand. - Necessity of the good: Necessities tend to have inelastic demand. - Time period: Demand is generally more elastic in the long run. - Proportion of income spent: Larger portions of income spent lead to more elastic demand.
• What are the characteristics of elastic demand?

  - Percent change in quantity demanded is greater than percent change in price. - Price elasticity value is greater than 1.
• What are the characteristics of inelastic demand?

  - Percent change in quantity demanded is less than percent change in price. - Price elasticity value is less than 1.
• What are the characteristics of unit elastic demand?

  - Percent change in quantity demanded is equal to percent change in price. - Price elasticity value is exactly 1.
• What are examples of goods with elastic demand?

  - Luxury goods (e.g. high-end electronics, designer clothing) - Discretionary goods (e.g. entertainment, travel) - Goods with many close substitutes (e.g. generic vs. brand-name products)
• What are examples of goods with inelastic demand?

  - Necessities (e.g. food, water, electricity, healthcare) - Addictive goods (e.g. cigarettes, alcohol) - Goods with few substitutes (e.g. prescription drugs)
• What are examples of goods with unit elastic demand?

  - Goods where the percent change in quantity equals the percent change in price. - Examples are less common, but could include some basic commodities.
• Why is understanding price elasticity important for businesses?

  It informs pricing strategies, guides product development, and shapes marketing efforts.
• Why is understanding price elasticity important for policymakers?

  It helps assess the impact of taxes, informs subsidy and price control policies, and supports competition policy.