Price Elasticity of Demand (PED) is the responsiveness of quantity demanded to a change in price . It is the percentage change of quantity demanded in response to a one percent change in price. Demand is said to be inelastic where PED is less than one, whereas it is said to be elastic where PED is greater than one.
PED is calculated by:
- (((Original Price - New Price) / Original Price) * 100) = % Change in Price
- (((Original Quantity Demanded - New Quantity Demanded) / Original Quantity Demanded) *100) = % Change in Quantity Demanded
- % Change in Quantity Demanded / % Change in Price = PED
Factors that affect PEDEdit
Number of SubsitutesEdit
The more (and closer) substitutes are available in the market, the more elastic demand will be in response to a change in price.
Luxuries and necessitiesEdit
Necessities, such as food, usually have a more inelastic demand curve because people will always need them, regardless of price, whereas luxury goods and services, such as video games, usually have a more elastic demand curve because people may be dissuaded by the price more easily.
Percentage of IncomeEdit
Typically the smaller the proportion of income that is used when purchasing a good or service, the more inelastic demand for that good will be. For example a chocolate bar may have a more inelastic demand than a television.
Goods such as alcohol and cigarettes tend to be more inelastic in demad because they cause addiction and people will pay more just to meet that addiction.
Demand is usually more elastic in the long term rather than the short term.