Price Elasticity of Demand (PED)
Measure the responsiveness of demand following a change in a products price.
- Price Elastic Demand
- Price Unit Elastic Demand
- Price Inelastic Demand
- Demand responds more than proportionately to a change in price.
- Demand responds proportionately to a change in price.
- Demand responds less than proportionately to a change in price.
Factor that affect PED
- Cost of switching suppliers
- Availability of substitutes
- % of income
- Degree of necessity
- Habitual purchase (addiction)
- Time frame
- Brand Loyalty
Short run vs Long run PED
- In long run…
- In short run…
- Reasons
- elasic
- inelastic
- Takes time to change habits
- Necessity
- Technology changes take time
Income Elasticity of Demand (YED)
Measures the responsiveness of demand following a change in disposable income
YED for types of goods
YED>1 Basic luxury e.g. TV
0,YED,1 Basic normal goods e.g. fresh fruit
YED<0 Inferior goods e.g. council-owned properties or brand own supermarket foods
Cross Price Elasticity of Demand (XED)
Measure the responsiveness of demand for good X following a change in the price of a related good Y.
XED for types of goods
XED>1 Strong Substitutes, e.g. CDs and digital music
0,XED,1 Weak Substitutes, e.g. Ketchup and Mayonnaise
-1,XED,0 Weak Compliments, e.g. Chicken and Rise
XED<-1 Stong Compliments, e.g. Popcorn and cinema tickets
Price Elasticity of Supply (PES)
Measures the responsiveness of supply after a change in a products price.
- Price Elastic Supply
- Price Unit Elastic Supply
- Price Inelastic Supply
- Supply responds more than proportionately to a change in price.
- Supply responds proportionately to a change in price.
- Supply responds less than proportionately to a change in price.
Factors that affect PES
- Spare capacity in the firm
- Stock of finished products and components
- Time period/speed of production
- Ease and cost of factor substitution/mobility (occupationally mobile?)
