Price Elasticity Of Demand, measures the responsiveness of demand to a change in price.
The formula used to calculate (PED) is:
Q1 = Old Quantity
Q2 = New Quantity
P1 = Old Price
P2 = New Price
If the answer using the above formula is less than 1 than the product has price inelastic demand
however, if the answer is greater than 1 than the product has price elastic demand.
Price Elastic Demand: When demand changes by a greater percentage than the changes in price.
Price Inelastic Demand: When demand changes by a smaller percentage than the changes in price.
Revenue Maximization By Using Price Elasticity Of Demand:
Revenue: Total reward of producing goods and services.
- Price/unit × Quantity produced /demanded
- Total cost + Total profit
The above diagrams show that:
If demand is inelastic, producers must charge high prices in order to maximize revenue.
If demand is elastic, producers must charge low price in order to maximize revenue.
Types Of Price Elasticity Of Demand:
Factors Affecting Price Elasticity Of Demand:
Availability Of Substitutes:
Substitutes more available PED will be elastic
Less substitutes available PED will be in elastic
Proportion Of Income Spent:
Small proportion (e.g. salt) PED will be inelastic
Large proportion (e.g. car) PED will be elastic
Nature Of Product:
Need (e.g. bread) PED will be inelastic
Luxuries (e.g. car) PED will be elastic
Addictive / Habit forming:
Cigarettes are addictive thus it will have inelastic PED.
Fashion and Trend:
In fashion PED will be elastic
Out of fashion PED will be inelastic