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Lecture Notes PED

Price Elasticity of Demand (PED) measures how quantity demanded responds to price changes, with classifications including elastic, inelastic, unitary, perfectly elastic, and perfectly inelastic. Key determinants of PED include the availability of substitutes, the nature of the goods (necessities vs luxuries), income proportion spent, time period, and addictiveness. Understanding PED is crucial for producers, consumers, and governments as it influences pricing strategies, spending behavior, and taxation policies.

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3 views2 pages

Lecture Notes PED

Price Elasticity of Demand (PED) measures how quantity demanded responds to price changes, with classifications including elastic, inelastic, unitary, perfectly elastic, and perfectly inelastic. Key determinants of PED include the availability of substitutes, the nature of the goods (necessities vs luxuries), income proportion spent, time period, and addictiveness. Understanding PED is crucial for producers, consumers, and governments as it influences pricing strategies, spending behavior, and taxation policies.

Uploaded by

mishibhandari1923
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lecture Notes – Price Elasticity of Demand (PED)

1. Definition
Price Elasticity of Demand (PED): Measures the responsiveness of quantity demanded to a change in
price.

2. Values of PED
• Elastic demand (PED > 1): % change in Qd > % change in Price.
• Inelastic demand (PED < 1): % change in Qd < % change in Price.
• Unitary elasticity (PED = 1): % change in Qd = % change in Price.
• Perfectly elastic (PED = ∞): Demand falls to zero if price rises.
• Perfectly inelastic (PED = 0): Demand does not change with price.

3. Determinants of PED (Factors affecting demand elasticity)


1. Availability of substitutes – More substitutes → demand more elastic.
2. Necessities vs. luxuries – Necessities → inelastic; Luxuries → elastic.
3. Proportion of income spent – Expensive items (high % of income) → elastic.
4. Time period – Demand more elastic in long run as consumers adjust.
5. Addictiveness – Addictive goods (e.g., cigarettes) → inelastic.

4. Importance / Implications of PED


• For producers:
o If demand is inelastic → raising prices increases revenue.
o If demand is elastic → lowering prices may increase revenue.
• For consumers:
o PED affects how much prices influence their spending (necessities vs luxuries).
• For government:
o Taxation policy: If demand is inelastic (e.g., petrol, alcohol), higher tax gives more
revenue.
o Subsidies: Elastic goods (e.g., education, public transport) respond well to subsidies,
increasing consumption.

5. Diagram
• Demand curve showing elastic vs inelastic demand.
• Steeper curve → inelastic; Flatter curve → elastic.

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