Key Words

Elasticity substitutes
Variables addictive
Elastic habit forming
Inelastic switch
Unitary elastic
PED
Formular
Substitutes
Necessity
Luxury goods
Normal goods
Brand loyalty
Total revenue
Total expenditure
Unitary elastic
Pricing strategy
Implication

What Is PED ?

What Are Formulars Of PED ?

1.

2.

3.
A Graphical Interpretation Of Price Elasticity
Ped At Particular Point

FIGURE

4.3 A Graphical Interpretation of Price Elasticity of Demand.

Price elasticity of demand at any point along a straight-line demand curve is

the ratio of price to quantity at that point times
 FIGURE 4.4 Calculating Price

Elasticity The price elasticity of demand at A is given by (P/Q) × (1/slope) =

(8/3) × (1/4) = 2/3.
CONCEPT CHECK 4.2
What is the price elasticity of demand when P = 4 on the demand curve
in Figure 4.4?
EXAMPLE 4.2The Relationship between Elasticity and Slope
For the demand curves D1 and D2 shown in Figure 4.5, calculate the
price elasticity of demand when P = 4. What is the price elasticity of
demand on D2 when P = 1?

FIGURE 4.5 Price Elasticity and the Steepness of the Demand Curve.
E(d1)?
E(d2)?

This example illustrates a general rule: If two demand curves have a point in
common, the steeper curve must be the less price-elastic of the two with
respect to price at that point.

However, this does not mean that the steeper curve is less elastic
at every point. Thus, we saw that at P = 1, price elasticity of demand
on D2 was only 1/5, or less than half the corresponding elasticity on the
steeper D1 at P = 4.

Price Elasticity Changes Along A Straight-Line Demand Curve

The slope of a straight-line demand curve is constant, which means that
1/slope is also constant. But the price–quantity ratio P/Q declines as we move
down the demand curve. The elasticity of demand thus declines steadily as
we move downward along a straight-line demand curve.

FIGURE 4.6 Elasticity at the Midpoint of a Straight-Line Demand

Curve.
FIGURE 4.7 Price Elasticity Regions along a Straight-Line Demand
Curve.
Two Special Cases
There are two important exceptions to the general rule that elasticity declines
along straight-line demand curves. First, the horizontal demand curve
in Figure 4.8(a) has a slope of zero, which means that the reciprocal of its
slope is infinite. Price elasticity of demand is thus infinite at every point along
a horizontal demand curve. Such demand curves are said to be perfectly
elastic.

FIGURE 4.8 Perfectly Elastic and Perfectly Inelastic Demand

Curves.The horizontal demand curve (a) is perfectly elastic, or infinitely
elastic, at every point. Even the slightest increase in price leads consumers to
desert the product in favor of substitutes. The vertical demand curve (b) is
perfectly inelastic at every point. Consumers do not, or cannot, switch to
substitutes even in the face of large increases in price.
Second, the demand curve in Figure 4.8(b) is vertical, which means that its
slope is infinite. The reciprocal of its slope is thus equal to zero. Price elasticity
of demand is thus exactly zero at every point along the curve. For this reason,
vertical demand curves are said to be perfectly inelastic.
What Are The Types Of PED ( Value/Size )
What are the Factors That Influence Price Elasticity?
1. The Availability of Substitutes
Reliable substitutes are one of the crucial factors influencing price elasticity of
demand. If a product has reliable substitutes in the market, its demand
undergoes a significant change. The more substitutes available, the more
elastic the demand for the good or service will be. Because consumers will
easily switch to substitute products instead. However, it’s vice versa for
inelastic products. As consumers have less substitute products to switch to
consume.
To put it simply here’s an example; the demand for electronics is relatively
elastic because there are other substitutes for it, whereas the demand for
gasoline, in general, is less elastic because there are no more substitutes
available to satisfy consumer needs.
‍
2. The Proportion of Income Spent on products
One of the vital factors affecting PED is the proportion of a consumer's income
that is spent on a product. Because the greater the proportion of income a
given price change takes, the more concerns of consumers who will engaging
in searching for substitutes products. Therefore, consumers would able to
sensitive about price change. On the contrast, less proportion of income spent
on a product, such as a bottle of water, consumers will not concern on its
impacts on other expenditure, meaning the less efforts will take to look for
substitute products. Therefore, the expensive products usually have higher
PED than cheaper commodities. Also, the high-income households/consumers,
the elasticity of demand is typically low but remains quite high for low-
income-level groups.

‍
3. The Time Frame
This too is one of the powerful factors affecting price elasticity of demand. It
refers to the pace at which the demand reacts to the change in price. To put it
simply, the pace at which consumers can switch to another alternative and
adjust their consumption habits.
In the short term, buyers tend to stick to the same item, fail to find
substitutes, and are unable to adjust their consumption habits, leading to the
product’s inelastic demand. However, in the long term, consumers may be
able to find substitutes or adjust their consumption habits, leading to more
elastic demand. Also, over time, more substitutes enter the market over time
allowing consumers to switch their consumption more easily if price are rising
for other goods and services.

4. classification of goods
Broader classification of goods- less likely to find substitutes
Narrower classification of goods- more likely to find substitutes
‍
5. The Degree of Necessity
Demand responds to price changes depending on the product’s degree of
necessity. Necessities, such as food and housing, tend to have inelastic
demand as consumers will continue to purchase them regardless of price
changes. That’s because there is no other reliable substitute or finding an
alternative would require time, energy and investment.
On the other hand, luxury goods, such as designer clothing and high-end cars,
tend to have more elastic demand because consumers are more likely to cut
back on purchases when prices increase.

‍ . Addictive nature of goods/ habit forming good

6
If the good in question is addictive or habit forming such as stamp collecting,
demand for it will be price inelastic. This is because even when the price of
these goods increase, an individual may not be able to stop themselves from
consuming it due to it addictive or habit-forming nature. In this sense if the
price of the goods increase, the proportionate decrease in quantity demand is
less than the rise in the price.

5. Brand Loyalty
Brand loyalty can also affect the price elasticity of demand. Consumers who
are loyal to a particular brand may be less likely to switch to substitutes, even
if prices increase, leading to inelastic demand. This, however, is not as water-
tight as it seems. Brand loyalty loses influence in times of recession when
consumers might opt for cheaper products despite the perceived lower
quality. Income level is another accompanying factor that combined with
brand loyalty impacts the elasticity of demand.
‍
6. The Level of Competition
In a market with high levels of competition, firms will have to be more
responsive to changes in consumer demand, leading to more elastic demand.
If they are replaceable with other similar items, the demand will fall as prices
rise. Hence, companies tend to remain competitive by adjusting their prices
after studying their competitors.
On the other hand, in a market with less competition, firms are able to charge
higher prices without losing as many customers, thanks to the commodities’
inelastic demand.
‍
7. The Availability of Information
The availability of information about a good or service is another factor
influencing price elasticity of demand. When consumers have access to more
information about a good or service, they are more likely to make well-
informed purchasing decisions, which can lead to more elastic demand. We
live in a time when countless reviews as well as information on alternatives
are a few clicks away. As such, it’s more important than ever to capitalise on
your online presence and make sure the web works for you rather than
against you.
How does Ped Determining the Relationship Between Price And TR Or
TE
Inelastic of demand

Elastic of demand
Summary
 FI

GURE 4.12 Total Expenditure as a Function of Price.

Rule 1: When price elasticity of demand is greater than 1, changes in price
and changes in total expenditure always move in opposite directions.
Rule 2: When price elasticity of demand is less than 1, changes in price and
changes in total expenditure always move in the same direction

FIGURE 4.13 Elasticity and the Effect of a Price Change on Total

Expenditure.

Why The War On Drug Is Hard To Win ?

Profiting from bad time

Hot To Use PED To Make Decisions?

Producer
 Pricing strategy
 Impacts analysis of new price

Examples
1. Luxury Goods
‍
Luxury goods are often considered examples of elastic demand because
they are not essential items people need to survive. Examples of luxury
goods include high-end clothing, jewellery, and designer handbags.
Therefore, when the prices of these items go up, consumers may delay
their purchase or look for more affordable alternatives.
‍
For example, suppose a high-end clothing brand raises the price of its
products. Customers who value the brand but find the price increase too
high may purchase clothes from a different brand or wait for a sale.
‍
In contrast, if the brand lowers its prices, there may be an increase in
demand from customers who were previously unable or unwilling to
purchase the clothing at a higher price.

Similarly, when the price of luxury goods decreases, there may be an

increase in demand from customers who previously could not afford them.
The price reduction may make the goods more accessible and appealing
to a broader range of consumers.
‍
3. Fast Food
‍
Fast food is another price elastic product example because it is a
discretionary expense that people can easily avoid if the price becomes
too high. When the cost of fast food increases, consumers may choose to
cook at home or opt for cheaper alternatives. On the other hand, when
fast food prices fall, demand usually increases.
‍
For example, if a fast food chain raises the price of its menu items,
customers may buy food from a different restaurant or cook their meals at
home. However, if the fast food chain lowers its prices, customers may be
more likely to buy meals from the restaurant.
‍
Fast food chains often offer discounts or special promotions to attract
more customers. For example, they may offer "value meals" that include
several items at a lower price than if purchased separately. They may also
offer coupons or loyalty programs that reward customers for repeat
 purchases.

4. OTT Platforms
‍
One of the price elasticity of demand examples of today is the streaming
services like Netflix, HayU, Amazon prime, and the like because viewers are
susceptible to switching to another OTT platform if there is a price rise.
Moreover, along with price changes, the availability of shows also matters to
the customers. Such factors influence the consumers decision to continue
their subscription.
‍
To explain how business use PED to make decision

Businesses can use PED calculations to make pricing decisions that can
increase total revenue. For example if a business knows that demand for its
good is price elastic it should reduce its price from P1 to P2 in order to
increase total revenue. This is because by reducing the price, there would be
a proportionately greater increase in quantity demand from Q1 to Q2 than the
fall in price from P1 to P2. Given that total revenue is the price of a good
multiplied by the number of units sold, a smaller price is being multiplied by a
much greater quantity, increasing total revenue from 0P1AQ1 to 0P2BQ2. The
revenue gained is clearly greater than the revenue lost.

Diagram

Businesses can use PED calculations to making pricing decisions that can
increase total revenue. For example if a businesses knows that demand for its
good is price inelastic it should increase its price from P1 to P2 in order to
increase total revenue. This is because by increasing the price, there would be
a proportionately smaller decrease in quantity demand from Q1 to Q2 than
the increase in price from P1 to P2. Given that total revenue is the price of a
good multiplied by the number of units sold, a smaller quantity is being
multiplied by a much greater price, increasing total revenue from 0P1AQ1 to
0P2BQ2.
The revenue gained is clearly greater than the revenue lost. Profitability would
now increase for the firm as quantity has fallen which would reduce total costs
whilst total revenue is increasing.

Diagram

The price volatility in a market following changes in supply - this is important

for commodity producers who suffer big price and revenue shifts from one
time period to another.

If a producer does not have control over the price of its product, perhaps
because the price is determined in an international market; if demand is price
elastic and prices are expected to fall a business can prepare for a large
increase in demand by increasing its level of stocks, output and employment
to meet this higher demand. If new workers are not brought in, the firm should
increase the productivity of its workers through training and specialisation.

Evaluations =Criticism of Elasticity for Business Decision Making

1) Elasticity calculations are only estimates. This is because price elasticity of
demand data for example may have been collected from surveys, where
responses cannot be fully trusted; competitor data, where responses may be
vastly different or past data, which may not reflect current consumer habits.
Consequently, elasticity data can be unreliable, inaccurate and may change
over time. Therefore for a business to base important decisions regarding
pricing, stocks, output and employment on them solely would be dangerous.
Instead elasticity data should be used as guide alongside other important data
sources when making business decisions.

2) The assumption of ceteris paribus can be misleading. This is because for all
elasticity calculations only one variable is assumed to impact upon quantity
demanded or supplied when in reality there are many other factors that can
affect demand and supply which a business must take into account when
making important decisions. For example, it is too simplistic to recommend
that a business raise its price due to price inelastic demand. Factors such as
income, the price of substitutes, a change in fashion/tastes and interest rates
could well offset this impact actually leading to a decrease in demand.This
must be factored into decision making.

3) Elasticity varies along the demand curve. Businesses must be careful not to
generalise elasticity values to all changes in price. For example using the PED
figures generated when price increases from £100 to £110 (a 10% rise) to
estimate the demand response with 10% increase in price from £110 to €121
is fraught with danger and likely to provide inaccurate responses. Therefore
businesses must be sure to calculate PED calculations for all changes in prices
to get a more accurate reflection of the likely demand response given that
elasticity varies along the demand curve.