# data[].attributes.attachment_link.readable_text
Price elasticity of demand (PED) measures the responsiveness of demand after a change in price.

Example of PED

If price increases by 10% and demand for CDs fell by 20%

Then PED = -20/10 = -2.0

If the price of petrol increased from 130p to 140p and demand fell from 10,000 units to 9,900

% change in Q.D = (-100/10,000) *100 = - 1%

% change in price 10/130 ) * 100= 7.7%

Therefore PED = - 1/7.7 = -0.13

If price increase from £50 to £55 and PED was 0.5 How much did quantity demanded fall?

0.5 = % change in QD

Therefore % QD = -5

If you need help calculating a percentage, see: How to calculate a percentage

Price Elastic Demand

Definition: Demand is price elastic if a change in price leads to a bigger % change in demand; therefore the PED will, therefore, be greater than 1.

1. They are luxury goods, e.g. sports cars

2. They are expensive and a big % of income e.g. sports cars and holidays

3. Goods with many substitutes and a very competitive market. E.g. if Sainsbury's put up the price of its bread there are many alternatives, so people would be price sensitive.

4. Bought frequently

Goods which are elastic, tend to have some or all of the following characteristics.

Price Inelastic Demand

Inelastic demand PED <1 - Perfectly inelastic PED =0

These are goods where a change in price leads to a smaller % change in demand; therefore PED <1 e.g. - 0.5

1. They have few or no close substitutes, e.g. petrol, cigarettes.

2. They are necessities, e.g. if you have a car, you need to keep buying petrol, even if price of petrol increases

3. They are addictive, e.g. cigarettes.

4. They cost a small % of income or are bought infrequently.

In the short term, demand is usually more inelastic because it takes time to find alternatives

If the price of chocolate increased demand would be inelastic because there are no alternatives, however, if the price of Mars increased there are close substitutes in the form of other chocolate, therefore, demand will be more elastic.

Goods which are inelastic tend to have some or all of the following features:
Graph showing increase in Revenue following increase in price
Using Knowledge of Elasticity

1. If demand is inelastic then increasing the price can lead to an increase in revenue. This is why OPEC try to increase the price of oil.

2. If demand is elastic, firms would be unlikely to increase revenue as this could lead to a fall in revenue. Instead, they could try advertising to increase brand loyalty and make demand more inelastic

3. Price Discrimination. Some people pay higher prices for tickets for trains because their demand is more inelastic.

Adults (with more inelastic demand) face higher prices. Students with more elastic demand get lower price.

4. Tax incidence. If demand is price inelastic, then a higher tax will lead to higher prices for consumers (e.g. tobacco tax). The tax incidence will mainly be borne by consumers. If demand is price elastic, firms will face a bigger burden, and consumers will have a lower tax burden.

More types of elasticity

Video - Understanding Elasticity

# data[].attributes.attachment_link.title
Price Elasticity of Demand (PED) - Economics Help

# data[].attributes.attachment_link.description
Price elasticity of demand (PED) measures the responsiveness of demand after a change in price.

# data[].attributes.attachment_link.title
Demand and Supply Explained- Macro Topic 1.4 (Micro Topic 2.1)

# data[].attributes.attachment_link.readable_text
The individual demand curve illustrates the price people are willing to pay for a particular quantity of a good.

The market demand curve will be the sum of all individual demand curves. It shows the quantity of a good consumers plan to buy at different prices.
1. Change in price
A change in price causes a Movement along the Demand Curve.

E.g. if there is an increase in price from £9 to £12 then there will be a fall in demand from 30 to 22

Shifts in the demand curve

This occurs when, even at the same price, consumers are willing to buy a higher (or lower) quantity of goods. This will occur if there is a shift in the conditions of demand.

Diagram to show shift in demand

A shift to the right in the demand curve can occur for a number of reasons:

1. Income. An increase in disposable income enabling consumers to be able to afford more goods. Higher income could occur for a variety of reasons, such as higher wages and lower taxes.

2. Quality. An increase in the quality of the good e.g. better quality digital cameras encourage people to buy one.

3. Advertising can increase brand loyalty to the goods and increase demand. For example, higher spending on advertising by Coca Cola has increased global sales.

4. Substitutes. An increase in the price of substitutes, e.g. if the price of Samsung mobile phones increases, this will increase the demand for Apple iPhones - a major substitute for the Samsung.

5. Complements. A fall in the price of complements will increase demand. E.g. a lower price of Play Station 2 will increase the demand for compatible Play Station games.

6. Weather: In cold weather there will be increased demand for fuel and warm weather clothes.

7. Expectations of future price increases. A commodity like gold may be bought due to speculative reasons; if you think it might go up in the future, you will buy now.

Fall in demand

A fall in demand could occur due to lower disposable income or decline in popularity of the good.
Evaluation
For some luxury goods income will be an important determinant of demand. e.g. if your income increased you would buy more restaurant meals, but probably not more salt.

Advertising is important for goods in which branding is important, e.g. soft drinks but not for bananas.

Other types of demand

Effective demand: This occurs when a consumers desire to buy a good can be backed up by his ability to afford it.

Derived demand: This occurs when a good or factor of production such as labour is demanded for another reason

A Giffen good is a good where an increase in price of a basic item leads to an increase in demand, because very poor people cannot afford any other luxury goods.

An ostentatious good, is a good where an increase in price leads to an increase in demand because people believe it is now better.

Composite demand - A good which is demanded for multiple different uses

Joint demand - goods bought together e.g. printer and printer ink.

Related pages

# data[].attributes.attachment_link.title
Factors affecting demand - Economics Help

# data[].attributes.attachment_link.description
The individual demand curve illustrates the price people are willing to pay for a particular quantity of a good. The market demand curve will be the sum of all individual demand curves. It shows the quantity of a good consumers plan to buy at different prices. 1.

# data[].attributes.headline
Demand has a huge impact on not only price and demand, but the economic problem as a whole

# data[].attributes.subject
Demand has a huge impact on not only price and demand, but the economic problem as a whole

# data[].attributes.body
This padlet will help breakdown the importance that demand has in our daily lives

# data[].attributes.headline
How demand can affect price and quantity

# data[].attributes.subject
How demand can affect price and quantity

# data[].attributes.body
put together by: Richard Naccarato