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Price Elasticity of Demand (Determinants of PED (Addicitive products…
Price Elasticity of Demand
Measures the responsiveness of demand to a change in price
Elastic demand
When the change in demand is greater then the change in price
Inelastic demand
Supply and demand are unaffected when the price of a good changes
When the price goes up and down, consumers will continue to buy
Determinants of PED
Addicitive products (Ciggarettes)
Taste and fashion
Substitues
Population
Stage of economic cycle
PED calculations
Change in price / original price x 100
% change in Qd / %change in price
Change in demand / Orginal demand x 100
Elastic
Perfectly inelastic
PED coefficient is 0
The business could charge as high as it wants to
Price inelastic
PED coefficient is between 0 and 1
A firm should raise its price, the demand will decrease, but the total revenue would increase
Elastic
Perfectly elastic
PED coefficient is infinity
If the business increased the price a certain point, the demand would disappear
Price elastic
PED coefficient is between 1 - infinity
A firm should lower its price so the demand can increase which can lead to an increase in total revenue