1.2.4 Price Elasticity of Demand (PED)

Price Elasticity Of Demand (PED)

🔗 The extent to which a change in price will cause a change in demand

Price

Price elastic = answer is greater than 1

Price inelastic = answer is between 0 and 1

• Price elastic: Change in demand is more than the change in price
• Price inelastic: Change in demand is less than the change in price

Factors Influencing Price Elasticity Of Demand

• Brand strength 🔗 Brand strength results in higher customer loyalty, making the products more price inelastic.

• Availability of substitutes 🔗 More available substitutes result in a more elastic PED. Consumers are more sensitive to price as there is greater consumer choice. Therefore, they can easily find a cheaper alternative product if the price of one rises.

Other factors:

Luxury or necessity

🔗 Luxury goods have an elastic PED, whereas goods that are a necessity, have an inelastic PED due to them being required by consumers

USP and product differentiation

🔗 A USP and a unique product can make demand more inelastic, due to other businesses not offering the same product, resulting in there being fewer substitutes

Proportion of income

• If purchasing a product takes up a larger percentage of income it's more elastic The relationship between price elasticity of demand and total revenue:

If a product has an elastic PED

Increase in price = Decrease in total revenue (deterring customers with higher prices)

Decrease in price = Increase in total revenue (attracting customers with lower price)

If a product has an inelastic pED

Increase in price = Increase in total revenue (people still buy no matter what the price is)

Decrease in price = Decrease in total revenue (a lower price means people think quality has dropped so stop buying)

• This is because sales won't change with price so lowering prices will lower revenues.