Price and Income Elasticity of Demand

Price Elasticity of Demand

Elasticity measures the extent to which price changes affect demand.

The 'law of demand' means when a company increases the price of a product, it expects to lose some sales. Some customers will switch to a rival supplier.

However, price elasticity looks beyond 'the law of demand' to ask when the price goes up, by how much do sales fall?

PED= % change in quantity demanded / % change in price

Price elasticity measures the percentage effect on demand of each 1% change in price.

e.g. if a 10% increase in price led deamdn to fall by 20%, the price elasticity would be -2 (elastic)

-2 indicates that for every 1% change in price, demand will move by 2% in the opposite direction

Determinants of Price Elasticity

*Why do some products, services or brands have low price elsaticity and some high elasticity?

1. The Degree of Product Differentiation:

The extent to which customers view the product as being distinctive from rivals.

If a product is the same as its competitors and they rise their prices, it is easy for customers to switch to a cheaper alternative.

Therefore, the higher the product differentiation, the lower the price elasticity.

2. The availability of substitutes:

If there is a cheaper alternative of the same product, customers will go for that one.

But it depends on whether the product is the only one available in a certain store e.g. sprite is the most popular lemonade in most stores because it is a Coca-Cola…