Factors affecting Price Elasticity of Demand Flashcards
(13 cards)
What is Price Elasticity of Demand?
Price Elasticity of Demand measures the proportional responsiveness of quantity of demand to a change in price.
How do you calculate PED (Price Elasticity of Demand)?
%change in quantity demanded / %change in price
PED value of 0 is…
Perfectly inelastic
-The Quantity Demanded is completely unresponsive to a change in Price
PED value of 0-1 is…
Relatively Inelastic -The % change in Quantity Demanded is less than proportional to the % change in Price
PED value of 1-infinite is…
Relatively Elastic The %change in Quantity Demanded is more than proportional to the %change in Price
PED value of 1 is…
Unitary Elastic The % change in Quantity Demanded is exactly equal to the %change in Price.
PED value of infinite is…
Perfectly Elastic
The %change in Quantity Demanded will fall to zero with any %change in Price
What factors affect price elasticity of demand?
S-Substitutes
P-Proportion of Income
L-Luxury/necessity
A-Addiction
T-Time
How does substitutes affect price elasticity of demand?
Availability of substitutes:
Good availability of substitutes results in a higher value of PED (relatively elastic)
How does proportion of income affect price elasticity of demand?
Price of product as a proportion of income: #
The lower the proportion of income the price represents, the lower the PED value will be. Consumers are less responsive to price changes on cheap products (relatively inelastic)
How does luxury/necessity affect price elasticity of demand?
The more a good is seen as a necessity, the more inelastic its demand tends to be, and the more it is seen as a luxury, the more elastic its demand becomes.
How does addiction affect price elasticity of demand?
Addictiveness of the product:
Addictiveness turns products into necessities, resulting in a low value of PED (relatively inelastic)
How does time affect price elasticity of demand?
Time period:
In the short term, consumers are less responsive to price increases, resulting in a low value of PED (relatively inelastic). Over a longer period of time, consumers may feel the price increase more and will then look for substitutes, resulting in a higher value of PED (relatively elastic)
