Price Elasticity of Demand (PED)

• PED is Price Elasticity of Demand.
• PED measures how much the quantity demanded of a product changes when its price changes.
• PED is calculated by dividing the percentage change in quantity demanded by the percentage change in price.
• Businesses and policymakers use PED to understand how changes in price affect consumer demand.

PED Values and Interpretation

• PED > 1 indicates elastic demand, where the quantity demanded changes more than the price.
• PED < 1 indicates inelastic demand, where the quantity demanded changes less than the price.
• PED = 1 indicates unit elastic demand, where the quantity demanded changes the same amount as the price.
• PED = 0 represents perfectly inelastic demand, where the quantity demanded does not change when the price changes.
• PED = ∞ means perfectly elastic demand, where any price increase causes demand to drop to zero.

Factors Affecting PED

• More substitutes lead to a higher PED due to consumers having options to switch to.
• Necessities have lower PED, while luxuries have higher PED.
• Goods that take up a large portion of income have higher PED.
• PED is typically higher in the long run compared to the short run.
• Strong brand loyalty results in lower PED.
• Addictive goods tend to have very low PED.

Implications of PED

• Businesses use PED to make optimal pricing decisions.
• PED helps predict how changes in price will affect total revenue.
• PED affects how the burden of a tax is divided between consumers and producers.
• Governments use PED to predict the impact of taxes and subsidies.

PED and Revenue

• If demand is elastic (PED > 1), decreasing the price will increase total revenue.

• If demand is inelastic (PED < 1), increasing the price will increase total revenue.

• If demand is unit elastic (PED = 1), changing the price will not affect total revenue.

• PES is Price Elasticity of Supply.

• PES measures how much the quantity supplied of a product changes when its price changes.

• PES is calculated by dividing the percentage change in quantity supplied by the percentage change in price.

• Businesses and policymakers use PES to understand how changes in price affect production decisions.

PES Values and Interpretation

• PES > 1 indicates elastic supply, where the quantity supplied changes more than the price.
• PES < 1 indicates inelastic supply, where the quantity supplied changes less than the price.
• PES = 1 indicates unit elastic supply, where the quantity supplied changes the same amount as the price.
• PES = 0 represents perfectly inelastic supply, where the quantity supplied does not change when the price changes.
• PES = ∞ means perfectly elastic supply, where suppliers will supply any quantity at a given price.

Factors Affecting PES

• More readily available inputs lead to higher PES.
• Excess production capacity allows for higher PES.
• PES is typically higher in the long run compared to the short run.
• Goods that can be easily stored tend to have higher PES.
• Simpler production processes lead to higher PES.

Implications of PES

• PES helps predict how producers will respond to price fluctuations.
• Businesses use PES to plan production levels based on market prices.
• PES affects how the burden of a tax is divided between consumers and producers.
• Governments use PES to predict the impact of policies affecting supply.

PES and Market Equilibrium

• High PES enables supply to adjust quickly to changes in demand, resulting in smaller price changes.
• Low PES means supply cannot adjust quickly to changes in demand, resulting in larger price changes.