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Elasticity of Demand, There are 5 main values of PED:, When a product has…
Elasticity of Demand
Key Values
PED = 0
Demand is perfectly inelastic, meaning there is no change in demand despite price changes
PED = 0 < x < 1
Demand is inelastic as the change in quantity demanded is less significant compared to the change in price
PED = 1
Demand is unit elastic as the percentage change in demand is the same as the percentage change in price
PED >1
Demand is elastic, meaning demand changes significantly when there is a change in price
PED = Infinity
Demand is perfectly elastic, meaning an increase in price will immediately cause demand to fall to zero
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Definition
Price elasticity of demand or PED is the responsiveness of demand in respect to the change in price of the product. We are basically comparing the change in quantity demanded relative to the change in price.
Key Values
YED = 0 < x < 1
The positive value shows that it is a normal good and the fact that it is in between 0 and 1 shows that there is a inelastic response therefore the normal good is income inelastic.
YED < 0
With the value less than 0, it is a negative number which shows that it is an inferior good. Demand for the goods decreases as income rises. the product is income inelastic and is an inferior good
YED >1
The positive value of the YED shows that the product is a normal good which means demand increases with income. The fact that it is larger than one shows that demand changes a lot with the change in income. It is an elastic responese.
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DefInition
YED is the responsiveness of quantity demanded in respect to the change in income of consumers. This is basically the comparison between the change in income and the demand of a product.
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When a product has a lot of substitutes, consumers will most likely choose the one that fits them best or the cheapest product. If prices change and competition is tight, demand is likely to be more elastic as consumers switch from one supplier to another.
*This however is not always the case as addictive products like alcohol and tobacco products may be more likely to be inelastic as people will still buy these products no matter the price
As mentioned before, the price of a product is very important as people will have to spend more of their disposable income if prices are high. This causes consumers to want to choose products that are the cheapest and the most worth it. This causes PED to increase since if the price of the product is too high for its quality or if the product does not meet its expectations, demand will decrease.
PED is taken in a specific period of time. If during this time price changes but goes back to normal within a few moments than PED will most likely stay the same. However, if the price increases and stays high, PED will most likely increase as time goes on since people will start to want to find cheaper products. With the continuous development of technology, something like this will most likely happen and better quality substitutes will appear in the market.
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GDP per capita is also known as the income per head. This is very important as this is the main point of YED. If GDP per capita changes, income changes and that will change the value of YED.
Tax imposed by the government can include both indirect tax as well as income tax. Indirect tax causes prices of products to increase, while direct tax such as income tax reduced the disposable income of the consumers. With less disposable income, purchasing power decreases and this will affect the YED.