Summary Elasticity

Theme 1 Topic 13
Elasticity
Price Elasticity of Demand (PED)
What Factors Affect the Demand for a Product?

 Quality  Substitutes
 Price  Complimentary goods
 Income  Advertising
 Tastes/trends

Price Elasticity of Demand

 Looks at how demand responds to changes in price – expressed as a percentage.

Price Elasticity of Demand = % Change in Demand
% Change in Price

If demand is very responsive (elastic) to price, then the PED figure will be bigger than 1

If demand is not very responsive (inelastic) to price, the PED figure will be less than 1

ALWAYS IGNORE THE MINUS SIGN BUT LOOK AT THE SIZE OF THE NUMBER. E.g. a PED of -0.8 means that the
demand is price inelastic.

Why Does Price Elasticity Matter?

 If you know that demand will respond significantly to price changes then you may want to lower price
to increase sales revenue.
 Also, if you know how demand will alter then you can plan staffing and production to meet the
change in demand.

What Factors Influence Price Elasticity?

 Type of product
 Competition
 Brand image

Price Elasticity and Impact on Revenue:

If a product is price elastic, dropping the price will increase revenue as it may increase sales.

Revenue – the value of total sales received (Price x Quantity Sold)

Knowing whether price elasticity of demand is elastic or inelastic helps make decisions to maximise revenue.

Figure Effect of Price Fall Effect of Price Rise
Price Elastic Demand PED = > 1 (Ignore minus) Revenue Increases Revenue Decreases
Price Inelastic Demand PED = < 1 (Ignore minus) Revenue Decreases Revenue Increases

Price Inelastic Demand – the change in demand is smaller in percentage terms than the percentage change in
price = demand is not very responsive to price changes.




Problems with Using Price Elasticity