Define price elasticity of demand (PED)
PES is the responsiveness of quantity demanded due to a change in price
What is the equation for price elasticity of demand (PED)
%change in quantity demanded / %change in price
Queen before Prince, Quantity before Price
Why is PED always negative?
The negative law of demand
What are the five degrees of PED?
PED - 0 Perfectly inelastic
PED < 1 Inelastic
PED = 1 unitary
PED > 1 Elastic
PED = ♾️ Perfeclty elastic
What do the graphs look like for the five degrees of PED?
PED = 0 | vertical PERFECTLY INELASTIC
PED < 1 \ slightly INELASTIC
PED = 1 \ perfectly demand line UNITARY
PED > 1 \ almost horizontal ELASTIC
PED ♾️ — horizontal PERFECTLY ELASTIC
What are the factors affecting PED?
REMEMBER SPLAT
-Substitute numbers (more close substitutes more elastic)
-Percentage of income used on item (apple uses less income so it is inelastic, electricity used a lot more so elastic and people will respond to a sudden change in price)
-Luxury or necessity (necessity are inelastic because you have to get them no matter what price
-Addictive or habitual (inelastic, must buy nmw)
-Time period (SR inelastic consumers don’t have time to look for substitutes, LR elastic a more substitutes become available)
What is the equation for total revenue?
Price X Quantiy
How do firms use PED to maximise Revenue?
If demand is elastic :
Price ⬆️ QuantityD⬇️ - TotalRevenue⬇️
Price⬇️ QuanityD⬆️ - TotalRevenue⬆️
if demand is inelastic:
Price⬆️ QuantityD⬇️LITTLE BIT - TotalRevenue⬆️
Price⬇️ QuanityD⬆️LITTLE BIT - TotalRevenue⬇️
Elastic - revenue opposite of price
Inelastic- revenue same as price
What is an example governments using the price elasticity of demand
Gov sees Inelastic good:
Demerit like cigarettes they put higher tax to gain more profit but also discourage use
Merit like education and healthcare they give subsidies to make sure everyone can have it
