Price Elasticity of Demand & Income Elasticity of Demand
Types of PED
a numerical measure of the responsiveness of the responsiveness of the quantity demanded to a change in price of a product (PED)
A numerical measure of the responsiveness of the quantity demanded following a change in income (YED)
Factors affecting PED and YED
Perfectly Inelastic
PED = 0
Where a change in price has no effect on quantity demanded
Inelastic
Calculated by: % change in quantity demanded/% change in price of that product
Nature of goods
PED <1
Unitary Elastic
The change in demand is less than the change in price
Elastic
Calculated by: % Change in quantity demanded/ % change in income
PED = 1
Change in price is relatively the same as change in quantity demanded
Perfectly Elastic
PED >1
Change in demand is more than change in price
PED = Infinity
When all that is supplied is sold at a given price
Types of YED
Positive YED
YED >1
Negative YED
YED < 1
When income increases, normal goods increases in demand
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When income increases, inferior goods increases in demand
Luxury goods are income elastic
Most necessities are income inelastic
Substitutes
If there are many substitutes the PED will be Elastic
If there are little substitutes the PED will be inelastic
Things to consider about substitutes
How necessary is the product
How addictive is a certain product
Quality and accessibility of information about products
the brand image of the product
PED
YED
If its a need, people will still buy it making YED inelastic
If its a want, people will have a choice to buy it making the YED elastic
If its a need, people will still buy it, making PED inelastic
If its a want, people will have the choice to have it, making PED elastic