Price Elasticity of demand (PED) Flashcards
Elasticity
The level of responsiveness of quantity demanded/supplied to a change in price
Price elasticity of Demand (PED)
The responsiveness of quantity demanded to a a change in price
Calculating PED
Percentage change in quantity demanded
/Percentage change in price
Elastic demand (high PED)
-When the change in quantity demanded exceeds the change in price (ratio of over 1)
-When drawn, relatively flat
Unit elastic demand (medium PED)
-When the change in price is equal to the change in quantity demanded
-Equal to 1
Unelastic Demand (low PED)
-When the change in quantity demanded is less than the change in price
-Ratio of below 0 (still postive)
-Line relatively steep
Factors influencing PED - Availability of substitutes
-No substitutes means low PED (inelastic)
-Abundance of substitutes tend to make products elastic (high PED)
Factors influencing PED - Degree of necessity
-Necessities like food, fuel tend to be inelastic, as opposed to luxuries being elastic
Factors influencing PED - Time period
Urgent need for something (e.g., medicine) tends to make it more inelastic (low PED), as people can’t wait for a change in price
Factors influencing PED - Proportion of income
-G+S which take up a large proportion of income will tend to be quite elastic, as consumers are less impulsive, think more before buying them. Changes in price of goods like oranges however, do not have as much an impact
Pricing of sales by firms
Firms will increase prices on inelastic g+s, they can also do sales (e.g 20% off) for elastic goods, so as to maintain profit.
Government revenue
-If they wanted to, the government could place a high indirect tax on goods like tobacco, which are inelastic, so as to maximine revenue
-Though, if the government is trying to decrease demand, this will be largely inefficient due to low PED.
