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1.2.4 Price Elasticity of Demand - Coggle Diagram
1.2.4 Price Elasticity of Demand
Price Elasticity of Demand (PED)
Measures the responsiveness of demand after a change in price
Formula
%change in quantity demanded/ % change in price
Interpretations of PED values
PED = 0
Demand = 'Perfectly inelastic'. Demand doesn't change after a a change in price
PED = decimal
demand = inelastic, change in demand < change in price
PED = 1
Demand = 'Unit elastic
PED > 1
Demand = elastic, change in demand > change in price
Elastic
Price increases, revenue decreases
Price decreases, revenue increases
Inelastic
Price increases, revenue increases
Price decreases, revenue decreases
Factors affecting PED
Brands + type of products/services
Degree of necessity
Number of subs available
unique + desirable product more likely to be inelastic
cost of switching between products
brand loyalty reduces sensitivity to price changes and reduces PED
product life cycle
introduction - less competitors = inelastic
later on in PLC - more competition = more elastic
advertising
shifts demand outward + make demand more inelastic
peak and off-peak demand
percentage of income spent on products
Firms can use PED estimates to predict
effect of changes in prices on total revenue + expenditure on product
likely price volatility in market after change in supply - important for commodity producers who suffer high price movements
effect of change in indirect tax on price + quantity demanded + whether business is able to pass on some or all tax onto consumer
info on PED can be used as a policy of price discrimination
businesses contemplating on price-war or promotional discount based on price - will want to know how responsive demand will be to tactics used