Price Elasticity of Demand definitions Price Elasticity of Demand Diagram Very Inelastic/Inelastic Demand for Very Elastic/Elastic Demand for Price
PEDs: The responsiveness of demand to changes in the price Price
Elastic if: Demand changes by a greater proportion than price
0 PED value PED value of between
(Responsive)
1% change in -1 and - infinity
Inelastic if: Demand changes by a smaller proportion than price
Price leads to 1% change in Price
(Unresponsive)
0% change in Leads to greater
Determinants: Addictive, necessity/luxury, substitutes available, %
Quantity Than 1% change in
income spent, width of definition (e.g. BP petrol vs Petrol as whole)
Demanded Quantity demanded
How is useful for firms: Helps firms Marketing Strategies, try to
+ P, + R + P, - R
reduce PED value of their products via advertisement and product
- P, - R - P, + R
development.
E.g. water E.g. Houses
heroin
PES
PED value of – infinity
Between 0 and -1 1% change in price
PED value. 1% Leads to infinite
Change in price Change in quantity
PED values fall along a linear D curve as the % Q Leads to less than Demanded.
demanded decreases but the % change in Price 1% change in + P, 0 R
Quantity demanded - P, 0 R
increases. PED value becomes more inelastic + P, + R
- P, - R
E.g. Cigarettes, petrol
Income Elasticity of Demand Definitions Equations Income Elasticity of Demand Table
Responsiveness of demand to changes in income
Useful for firms: IED Coefficient Description Detail
Product Range: Having a range of luxury, necessity and inferior Price Elasticity of Demand Equation
products ensures sales no matter what is happening to
Positive Between one and Normal good 1% change in
GDP/Incomes Relationship infinity Income Elastic income
Marketing: During periods of growth they will emphasise ‘luxurious’ % change in quantity demanded Normal good Luxury Greater than 1%
of product, during times of recession, ‘inferiority/necessity’.
Useful for Govts: Incomes rise over time, can tax luxury items ------------------------------------------- = -x + I, + Qd change in
% change in price - I, - Qd quantity
Normal Goods: Goods where increases in income leads to increases demanded
in demand
Inferior Goods: Goods where decreases in income leads to increases
Positive Between zero and Normal good 1% change in
in demand Income Elasticity of Demand Equation Relationship one Income inelastic income
Normal good Necessity Less than 1%
% change in quantity demanded + I, + Qd change in
-------------------------------------------- = IED - I, - Qd quantity
% change in income coefficient demanded
Inverse - ve Inferior good 1% change in
relationship income
Inferior good Any % change in
Q demanded
PEDs: The responsiveness of demand to changes in the price Price
Elastic if: Demand changes by a greater proportion than price
0 PED value PED value of between
(Responsive)
1% change in -1 and - infinity
Inelastic if: Demand changes by a smaller proportion than price
Price leads to 1% change in Price
(Unresponsive)
0% change in Leads to greater
Determinants: Addictive, necessity/luxury, substitutes available, %
Quantity Than 1% change in
income spent, width of definition (e.g. BP petrol vs Petrol as whole)
Demanded Quantity demanded
How is useful for firms: Helps firms Marketing Strategies, try to
+ P, + R + P, - R
reduce PED value of their products via advertisement and product
- P, - R - P, + R
development.
E.g. water E.g. Houses
heroin
PES
PED value of – infinity
Between 0 and -1 1% change in price
PED value. 1% Leads to infinite
Change in price Change in quantity
PED values fall along a linear D curve as the % Q Leads to less than Demanded.
demanded decreases but the % change in Price 1% change in + P, 0 R
Quantity demanded - P, 0 R
increases. PED value becomes more inelastic + P, + R
- P, - R
E.g. Cigarettes, petrol
Income Elasticity of Demand Definitions Equations Income Elasticity of Demand Table
Responsiveness of demand to changes in income
Useful for firms: IED Coefficient Description Detail
Product Range: Having a range of luxury, necessity and inferior Price Elasticity of Demand Equation
products ensures sales no matter what is happening to
Positive Between one and Normal good 1% change in
GDP/Incomes Relationship infinity Income Elastic income
Marketing: During periods of growth they will emphasise ‘luxurious’ % change in quantity demanded Normal good Luxury Greater than 1%
of product, during times of recession, ‘inferiority/necessity’.
Useful for Govts: Incomes rise over time, can tax luxury items ------------------------------------------- = -x + I, + Qd change in
% change in price - I, - Qd quantity
Normal Goods: Goods where increases in income leads to increases demanded
in demand
Inferior Goods: Goods where decreases in income leads to increases
Positive Between zero and Normal good 1% change in
in demand Income Elasticity of Demand Equation Relationship one Income inelastic income
Normal good Necessity Less than 1%
% change in quantity demanded + I, + Qd change in
-------------------------------------------- = IED - I, - Qd quantity
% change in income coefficient demanded
Inverse - ve Inferior good 1% change in
relationship income
Inferior good Any % change in
Q demanded
