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Price Elasticity of Demand (PED (% change Q % change P (PED > 1 -…
Price Elasticity of Demand
Definition
: the effect that a change in price has on quantity demanded. It describes the product or services responsiveness or sensitivity to price change.
Law of Demand
: when the price for a product goes up, demand goes down. When the price goes down, demand goes up.
Relatively Elastic demand
very responsive to price change. There is a significant reduction in demand
GRAPH: D curve is relatively flat.
Examples: Luxury goods, expensive goods, items purchased frequently
Relatively Inelastic Demand
Less responsive to price change. There is a smaller reduction in demand
Examples: essential goods like medication, addictive products like cigarettes and alcohol, items bought infrequently, or with few substitutes
GRAPH: d curve relatively steep
Perfectly Elastic Demand
Extremely responsive to price change. Demand dissapears completely when price changes
GRAPH: D curve is horizontal
Perfectly Inelastic Demand
completely unresponsive to price change
GRAPH: D curve is horizontal
PED
The unit to measure the elasticity of demand
% change in quantity demanded to a proportionate % change in price.
% change Q
% change P
PED > 1 - Elastic Demand
PED< 1 - Inelastic Demand
PED = 1 – Unit elastic (the % change in Price is = % change in Qd)
PED = 0 – Perfectly inelastic
PED = ∞ - Perfectly elastic
1) Availability of substitutes
2) cheapest of 2 complimentary goods
3) If the market is “broad” or “narrow”
4) The time period being looked at.
5) % income spent on the good.
6) Cost of the good
7) Durability