PED and YED

  • Created by: Victor_G
  • Created on: 22-01-18 13:58
Price Elasticity of Demand
Price elasticity of demand is a measure of how responsive demand is to a change in price.
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PED Equation
(% change in quantity demanded) / (% change in price)
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Price Elastic
The number is bigger than 1. The % change in price will lead to a larger % change in quantity demanded.
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Price Inelastic
The number is less than one. The % change in price will lead to a smaller % change in quantity demanded.
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Why is PED useful?
1) Helps a business decide or know whether they should increase their price or not. 2) More substitutes = Price elastic 3) It's incorrect to say that all products that are highly branded are price inelastic.
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PED and Implications on Price (1)
PED is more important to producers in mass markets where goods are likely to have more substitutes - so price increase can drive customers away (mass markets need to0 look for a product feature that'll stand out).
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PED and Implications on Price (2)
Find out whether a change in price is a good or bad idea.
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PED and Implications on Price (3)
Reasons for change in price: competitor pricing, cost of production, etc. Businesses can plan and adapt strategies ahead of time.
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PED and Implications on Price (4)
How a change in price will affect a business' revenue.
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Income Elasticity of Demand
A measure of the responsiveness of demand to a change in income.
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What Happens if Income Increases? (1)
When the demand for a product increases as income increases we call this a normal good, e.g. cars. Normal goods will always have a positive income elasticity of demand.
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What Happens if Income Increases? (2)
When demand for a product decreases as incomes increase we call this an inferior good, e.g. Tesco value. Inferior goods will always have a negative income elasticity of demand.
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Normal Luxury Goods
YED more than 1. As income grows, proportionally more is spent on luxuries. E.g. expensive holidays, branded goods.
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Normal Necessity Goods
Less than 1 but more than 0. As income grows, proportionally less is spent on necessities. E.g. staple groceries, own lable goods.
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Inferior Goods
These have a YED of less than one. For inferior goods as income rises, demand falls (consumers buy substitute products).
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YED Equation
(% change in quantity demanded) / (% change in income)
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Other cards in this set

Card 2

Front

(% change in quantity demanded) / (% change in price)

Back

PED Equation

Card 3

Front

The number is bigger than 1. The % change in price will lead to a larger % change in quantity demanded.

Back

Preview of the back of card 3

Card 4

Front

The number is less than one. The % change in price will lead to a smaller % change in quantity demanded.

Back

Preview of the back of card 4

Card 5

Front

1) Helps a business decide or know whether they should increase their price or not. 2) More substitutes = Price elastic 3) It's incorrect to say that all products that are highly branded are price inelastic.

Back

Preview of the back of card 5
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