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PED - the measure of the responsiveness of quantity demanded for a good following a change in the price of the good, other things being equal.

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PED always has a negative value.

-This represents the inverse relationship between quantity demanded and price.

I.e. when price increases, quantity demanded decrease (and vice versa)

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Goods with PED>1

These goods are price elastic.

This means that a small % change in their price leads to a bigger % change in the quantity demanded.

Example:

luxury goods (expensive cars etc.)

Goods with PED between 0 and 1

These goods are price inelastic.

This means that a small % change in their price leads to a smaller % change in the quantity demanded.

Example:

necessities (food, water)

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1) Availability of close substitutes

- goods with close substitutes may be more price elastic because consumers will want to switch to the substitutes if the price of the good increases.

2) % of income spent on the good

- when a small portion of income is spent on the good, PED tends to be inelastic as it has little impact on Qd following P change.

- when a large portion of income is spent on the good, PED tends to be elastic because it has a large impact on Qd if there is a P change.

3) Is it a luxury or a necessity?

- demand of luxuries tend to be price elastic because we don't necessarily need them.

i.e. people can cut down on consumption if P rises.

- demand of necessities tend to be price inelastic because we need them.

i.e. people will still buy these goods when P rises, thus Qd is less affected.

4) Is it a habit forming good?

- demand for habit forming goods tend to be inelastic.

This is because people cannot quit their addiction to them and may not have substitutes for them.

(cigarettes, alcohol etc.)

5) Time

- people find it difficult to change patterns/routines/habits short-term.

Therefore, in the short-run, if the P of a product increases, the Qd will be less affected.

The PED of the good will be more price inelastic.

- people will adapt over time and find alternatives.

Therefore, in the long-run, if P remains high, Qd will decrease, and PED will increase.

The PED of the good will be more price elastic.

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1) PED values are best seen as estimates.

- the elasticity values are calculated while assuming ceteris paribus (all things being equal) even though in practice, it is difficult to separate out all other influences.

2) Data may not be reliable or invalid.

- data may be collected from sources such as market research reports or surveys which may not be accurate or reliable.

- data collected over a long period of time may be unreliable because markets may be changing rapidly.

3) Data costs money and time

- conducting research and finding numerical values to find PED is expensive and takes a lot of time.

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It is hard to control PED because of the many external factors that affect it. Even if firms use persuasive advertising or create a brand image, consumer preference, market competition, lack of precision and reliability of the data collected will ultimately have an effect on PED.