PED(price elastic demand)

  • Created by: Manda1000
  • Created on: 10-01-17 11:11

Definition of price elastic demand

vPrice elasticity of demand is a measure of how responsive demand is to a change in price

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inverse relationship between price and demand

vAs price goes up demand goes down vAs price goes down demand goes up

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IMPORTANT

¤If PED is between 0 and -1 e.g. -0.7 then demand is price inelastic ¤If PED is less than -1 e.g. -1.4 then demand is price elastic

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Factors influencing PED

vThe availability of substitutes – the closer the substitutes and the more that are available the higher the price elasticity of demand

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Factors influencing PED

vThe price of competitor goods – if the price of goods in competition with a product increase this will affect demand and price elasticity of demand

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Factors influencing PED

vTime– the longer the time period the higher the price elasticity of demand.  Given more time other firms have the ability to produce similar products and customers have more chance of adapting their buying habits

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Factors influencing PED

vBranding– firms spend time and money building up their brand image.  By creating brand loyalty firms know that their customers will be willing to pay more for the product and they can therefore raise prices as the PED is lower

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Factors influencing PED

vIncome  - if consumer incomes are higher then the issue of price becomes less important to the consumer and it is easier for firms to raise price as the PED is lower

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Factors influencing PED

vNature of the good va luxury good will be price elastic as demand will be more sensitive to changes in price va necessity good will be price inelastic as demand will be less sensitive to changes in price

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IMPORTANT

Price elastic demand

Price inelastic demand

Raise selling price

Sales revenue will decrease

Sales revenue will increase

Lower selling price

Sales revenue will increase

Sales revenue will decrease

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Rearranging the formula

Problems of forecasting price elasticity of demand

vThe price elasticity of demand for a product is constantly changing in a dynamic world vIt is very difficult for firms to measure because: vDifficulty in finding accurate information vPrice elasticity changes over different price ranges vPrice elasticity will change over the period of the economic cycle e.g. it will be affected in a recession vTastes and fashions are constantly changing vCompetitors don’t stand still vThey are continually improving existing products, bringing out new products and trying to promote their products

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