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Price Elasticity of Demand (Linear graph (Price elastic demand (>1)…
Price Elasticity of Demand
Measure of RESPONSIVENESS of the quantity demanded of a commodity to changes in its price, C.P.
Movement along a demand curve in response to price change
%C in qty demanded/
%C in price
Usually negative
(Inverse relationship of law of demand)
Linear graph
Price elastic demand (>1)
Decrease in price
% change in qty > % change in price
Increase total revenue
Price Inelastic demand (<1)
Decrease in price
% change in qty < % change in price
Decrease total revenue
Varies from infinity at the price axis to zero at the quantity axis
Above midpoint, price is demand elastic v.v.
Rectangular Hyperbola
Unitary Price Elastic Demand (1)
(Change in QD x 100/Avg. 2 qty)/ (Change in Price x 100/Avg. 2 prices)
Decrease in price
% change in qty = % change in price
Same total revenue
Extreme Cases
Perfectly price inelastic demand (Vertical, 0)
Perfectly price elastic demand (Horizontal, infinity)
Availability of Substitutes
Greater the availability /closeness of substitutes
Higher PED
Method to make product more price inelastic
Advertising
Establishing consumers' view of uniqueness of a product
Definition of the Good or Service
Broadly defined good
Fewer Substitutes
Lower PED
Degree of Necessity
More necessary
Lower PED
Habit forming causes goods to become necessity
Proportion of income spent on good
Greater the proportion of income spent on product
Greater PED
Less effort taken to find substitutes when price increases
Time Period
Costly and time-consuming for buyers to gather information
Prices and the types of different goods
Degree to serve as substitutes for one another
Takes time for consumers to be aware of changes and adjust their consumption habits
Demand curve for particular good over shorter period of time has lower PED
News of price changes take time to percolate through the whole community
Habits take time to be broken
Commodity may be durable, so full reaction does not occur until all stock is replaced
Full adjustments require a lot of time
For Businesses
Main motive to increase total revenue
Price Elastic Demand
Decrease Price
Price decreases less proportionally than qty increase
Price Inelastic Demand
Increase Price
Price increases more than proportionally than qty decrease