Price elasticity of demand (PED)
Price elasticity of demand and its determinants
Price elasticity of demand: measures the responsiveness of quantity demanded to a change in price, along a given demand curve.
 Mathematically the value is negative, but we treat it as positive.
Price elastic demand (less than infinity).
Figure 2.1  Price elastic demand
Price inelastic demand (greater than zero)
Figure 2.2  Price inelastic demand
Unit elastic demand
 %change in P = %change in Qd
 Total revenue will not change when price changes (same revenue box)
Figure 2.3  Unit elastic demand
Perfectly elastic demand, demand is zero at all but one price.
Figure 2.4  Perfectly elastic demand
Perfectly inelastic demand, demand is constant at any price.
Figure 2.5  Perfectly inelastic demand
Determinants of PED:
 Number and closeness of substitutes: more substitutes available & closer → higher PED
 Degree of necessity (and how widely it is defined): lower the degree of necessity → higher PED; the more vague it is defined, i.e. food → higher PED
 As it is more narrowly defined → more subjective
 Time period considered: more time to consider → higher PED
 Inelastic in the short term, elastic in the long term
 Income spent: the higher the income spent → higher PED

 Value of PED falls as the measuring points move down a demand curve. PED is not represented by the slope of the demand curve.
Applications of price elasticity of demand
Applications of PED:
 Governments: if inelastic (low) PED → less consequence if P → impose more indirect tax
 Firms: if inelastic (low) PED → more revenue if P → price of the product rises