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PED (% change in qd / % change in price =PED (Quantity always goes on the…
PED
% change in qd / % change in price =PED
Quantity always goes on the top
The PED estimate never takes a % sign
If
Ped = 0
then demand is said to be
perfectly inelastic
. This means that demand does not change at all when the price changes – the demand curve will be vertical
If
Ped is between 0 and 1
(i.e. the percentage change in demand is smaller than the percentage change in price), then demand is
inelastic
. Producers know that the change in demand will be proportionately smaller than the percentage change in price.
If
Ped = 1
(i.e. the percentage change in demand is exactly the same as the percentage change in price), then demand is said to
unit elastic / unitary
. A 15% rise in price would lead to a 15% contraction in demand leaving total spending by the same at each price level.
If
Ped > 1
, then demand responds more than proportionately to a change in price i.e. demand is
elastic
. For example a 10% increase in the price of a good might lead to a 30% drop in demand. The price elasticity of demand for this price change is -3.
Perfect elastic
. An infinite amount of goods is demand at a given price, i.e. only quantity changes
For every 1% increase in price, ...
Elastic associated with competitive markets!
Why does a firm wish to know about PED?
Pricing policy
to increase revenue
Non-pricing policy
If demand is inelastic, firms can use advertising to reduce the elasticity
Sales forecasting
Determinants and Characteristics
INELASTIC:
Brand loyalty
Broad definition, e.g. food
Small proportion of the purchaser's budget consumed by the item
Short-run (Time)
Necessity
No-substitutes
Successful advertising/marketing campaign
High cost of switching product , e.g. internet provide
On peak rates
Price discrimination
Habitual good
ELASTIC:
Long-run (Time)
Non-necessity
Large proportion of the purchaser's budget consumed by the item
Substitutes
Unique product (no feasible substitute)
Low cost of switching supplier, e.g. bank
Off peak rates
Revenue
Elastic
Price decrease
Total revenue increases
Price increase
Total revenue falls
Inelastic
Price increase
Total revenue increases
Price decrease
Total revenue falls
Differing effect on price and quantity
If demand inelastic, ..
If demand elastic,...
Incidence of subsidy
Incidence of tax