- Category
- >Financial Analytics
5 Factors Affecting the Price Elasticity of Demand (PED)
- Ritesh Pathak
- Jan 12, 2021
There’s a lot more to a “market” than merely buying and selling. A plethora of activities are undergone behind bringing a product into the market. It requires proper market research before deciding on the manufacturing of a new product.
Different concepts in economics explain all these backstage happenings of a market. One such concept is elasticity.
Elasticity measures the sensitivity of one economic variable against a change in another economic variable. We often hear about demand and supply in economics and also in elasticity.
(You can also check out: What is elasticity in economics and what are its types).
The demand and supply of a product are affected by several other factors like price. The quantity demanded of a product changes when there is either a surge or a decline in its price. This sensitiveness of demand against a change in price is explained by the Price Elasticity of Demand.
What is Price Elasticity of Demand?
Price Elasticity of Demand (PED) is an economic tool that measures the change in quantity demanded of a product when there is a fluctuation in its price.
The mathematical equation to calculate Price Elasticity of Demand is given as:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
-
If this formula gives a number greater than 1, the demand is elastic. In other words, quantity changes faster than price.
-
If the number comes out to be less than 1, demand is inelastic. In other words, quantity changes slower than price.
-
If the number is equal to 1, the elasticity of demand is unitary. In other words, quantity changes at the same rate as price.
Since supply and demand are two related terms, a change in either of them will have an effect on the other.
Economists use price elasticity to understand the change in demand or supply given there is a price change. This helps them break down the working of the real economy.
Also sneak a peek at our blog on what is economics
5 Factors Affecting the Price Elasticity of Demand
A change in price does not always result in the same proportion of change in quantity demanded of a commodity.
For example, a small change in the price of Air Conditioner would cause a sharp rise in the quantity demanded, whereas a large change in the price of sugar won’t increase the quantity demanded to the same extent.
Several other factors affect the Price Elasticity of Demand (PED). Some goods are more sensitive or elastic while some are less. Availability of substitutes, type or nature of a product, income, price, and time are the five known factors that affect the PED.
1. Nature or type of Good
The Elasticity of Demand for a good is affected by its nature. Different goods can be a necessity good, a comfort good, or a luxury good for a person.
There is one more thing that is a single good can be a necessity for one person, a comfort for the second person, and a luxury for a third person. So, we can say that a good’s nature is relative.
Now, let us understand how nature affects the elasticity of demand.
i. A necessity good like vegetables, food grains, medicines and drugs, has an inelastic demand. Such goods are required for human survival so their demand does not fluctuate much against a change in their price.
ii. A comfort good like a fan, refrigerator, washing machine, etc., has an elastic demand as their consumption can be postponed for a time period.
iii. A luxury good like AC, Cars, Diamond has a relatively high elasticity of demand when compared to comfort goods.
“We've done price elasticity studies, and the answer is always that we should raise prices. We don't do that, because we believe -- and we have to take this as an article of faith -- that by keeping our prices very, very low, we earn trust with customers over time, and that that actually does maximize free cash flow over the long term.”
- Jeff Bezos, Amazon CEO
2. Availability of Substitutes
The Price Elasticity of Demand for a good, with a large number of substitutes available, is very high.
The possible reason behind this is that even a small rise in the price of such goods will induce its buyer to look for its substitutes. An example of this can be an FMCG product like a packet of chips. A rise of ₹2 on a packet of Lays will induce the buyer to go for Haldiram’s chips.
Thus, the availability of a large number of close substitutes increases the sensitivity against change in price, or we can also say that this increases the Price Elasticity of Demand.
3. Price Level
The price level of goods plays a major role in determining the price elasticity of demand. Goods that fall in a higher price segment are more likely to have high elasticity.
A price rise will further push them in the higher segment while even a small decline in the price can put them in the affordable segment. An example of this can be mobile phones or laptops. A person with a budget of 15k won’t go for a phone that is 20% more costly.
On the other hand, goods that belong to the low-price segment are generally inelastic or relatively less elastic. An example can be a packet of matchboxes. Even a sharp rise in its price won’t throw it into the high-price segment.
4. Income Levels
Our society is divided into different classes based on incomes and lifestyle. Upper-class people generally have a higher income and live a lavish life whereas the lower class people can’t afford luxury items because they have a low income.
Income levels have a considerable effect on the elasticity of demand. The Elasticity of Demand for a commodity is generally very low for higher income level groups. The change in prices does not bother people from such groups.
Whereas the Price Elasticity of Demand of a commodity is very high for people belonging to low-income level groups. Poor people are highly affected by the change in the prices of commodities.
5. Time Period
The price elasticity of demand varies directly with the time period. The given time period can be as shorts as a day and as long as several years.
The price elasticity of demand is directly proportional to the time period. This means the elasticity for a shorter time period is always low or it can be even inelastic.
The reason stated for this is the redundant human nature to change habits. We generally stick to a commodity and respond very late to the price changes. However, the elasticity of demand is high in a longer time period as our habit changes over time. We can substitute the original product if its price changes in the long run.
These were the factors that affect the Price Elasticity of Demand. Let us now sum up the blog by looking at the key takeaways.
Recommended Read: Micro vs Macro Economics
Elasticity vs Inelasticity
An inelastic product is one that has a very small effect on the quantity demanded even if there is a significant price change. It can also be said that the quantity demanded for inelastic goods remains almost static or has no effect of change in any economic factor.
Inelastic products are generally necessity products. Inelasticity of demand ensures that there is an adequate supply of such goods.
Since the quantity demanded is the same regardless of the price, the demand curve for a perfectly inelastic good is graphed out as a vertical line. Such goods have no good substitutes, which also ensures the quantity demanded remains unaffected.
Price-Demand curve for Elastic Demand
Manufactures or providers of inelastic goods and services can generate good revenue. For businesses, revenue generated from inelastic goods can go both ways. This means that it can prove profitable as well as marginal.
In case of price fall, the quantity demanded remains the same resulting in less revenue generation. While in times of price hike businesses earn significant profits.
This is the major benefit of inelastic goods over elastic ones. Manufactures or providers of inelastic goods and services can generate good revenue.
Key Takeaways
-
Elasticity of Demand is defined as the measure of change in the quantity demanded of a good when other economic variables like income and price are changed.
-
The three known types of Elasticity of Demand are: Price Elasticity of Demand (PED), Cross Elasticity of Demand (XED), and Income Elasticity of Demand (YED)
-
Throughout the blog, the concept of Price Elasticity of Demand (PED) has been focused on. It is defined as the sensitiveness of the demand of a commodity against a price change.
-
The formula given to calculate the Price Elasticity of Demand is
PED Formula
PED = % Change in Quantity Demanded / % Change in Price
On the basis of results obtained from the above formula, the Price Elasticity of Demand is categorized as elastic, inelastic, or unitary.
-
Inelastic Demand means that there is almost no effect of change in other economic factors on the quantity demanded of a good.
-
The Price Elasticity of Demand is affected by many factors. 5 crucial factors among them are: Availability of goods, Price Levels, Income Levels, Time Period, and Nature of goods.
Share Blog :
Or
Be a part of our Instagram community
Trending blogs
Elasticity of Demand and its Types
READ MORE5 Factors Influencing Consumer Behavior
READ MOREWhat is PESTLE Analysis? Everything you need to know about it
READ MOREAn Overview of Descriptive Analysis
READ MORE5 Factors Affecting the Price Elasticity of Demand (PED)
READ MOREWhat is Managerial Economics? Definition, Types, Nature, Principles, and Scope
READ MOREDijkstra’s Algorithm: The Shortest Path Algorithm
READ MORE6 Major Branches of Artificial Intelligence (AI)
READ MOREScope of Managerial Economics
READ MORE7 Types of Statistical Analysis: Definition and Explanation
READ MORE
Latest Comments
drmahlanguhome
Jan 19, 2023I lost my marriage and beautiful home wrecked by unhappiness seeing my wife walk away over the lies she was fed with and insecurities which were never true. I vowed from the beginning never to be a cheat and stood my ground to ensure I built a happy home but unfortunately she never trusted me enough. I wandered for months trying to get her back and sought help from various sources including her family intervention but never yielded success. I came in contact with Dr Mahlangu who I doubted at the earlier stage when i got in contact with. I had to keep hope alive and complied with the procedures just the way he explained everything to me. He assured me of her return which happened after two to 24 hours and i am yet to find words to express how happy and appreciative i am, knowing my son and I had his mom back home to us. I am telling everyone about Dr MAHLANGU and his kind heart helping people. Call / whats app +27787390989 Email; drmahlanguhome@gmail.com website :https://www.drmahlangu-home.com/ drmahlanguhome@gmail.com
drmahlanguhome
Jan 19, 2023I lost my marriage and beautiful home wrecked by unhappiness seeing my wife walk away over the lies she was fed with and insecurities which were never true. I vowed from the beginning never to be a cheat and stood my ground to ensure I built a happy home but unfortunately she never trusted me enough. I wandered for months trying to get her back and sought help from various sources including her family intervention but never yielded success. I came in contact with Dr Mahlangu who I doubted at the earlier stage when i got in contact with. I had to keep hope alive and complied with the procedures just the way he explained everything to me. He assured me of her return which happened after two to 24 hours and i am yet to find words to express how happy and appreciative i am, knowing my son and I had his mom back home to us. I am telling everyone about Dr MAHLANGU and his kind heart helping people. Call / whats app +27787390989 Email; drmahlanguhome@gmail.com website :https://www.drmahlangu-home.com/ drmahlanguhome@gmail.com
drmahlanguhome
Jan 19, 2023I lost my marriage and beautiful home wrecked by unhappiness seeing my wife walk away over the lies she was fed with and insecurities which were never true. I vowed from the beginning never to be a cheat and stood my ground to ensure I built a happy home but unfortunately she never trusted me enough. I wandered for months trying to get her back and sought help from various sources including her family intervention but never yielded success. I came in contact with Dr Mahlangu who I doubted at the earlier stage when i got in contact with. I had to keep hope alive and complied with the procedures just the way he explained everything to me. He assured me of her return which happened after two to 24 hours and i am yet to find words to express how happy and appreciative i am, knowing my son and I had his mom back home to us. I am telling everyone about Dr MAHLANGU and his kind heart helping people. Call / whats app +27787390989 Email; drmahlanguhome@gmail.com website :https://www.drmahlangu-home.com/ drmahlanguhome@gmail.com
drmahlanguhome
Jan 19, 2023I lost my marriage and beautiful home wrecked by unhappiness seeing my wife walk away over the lies she was fed with and insecurities which were never true. I vowed from the beginning never to be a cheat and stood my ground to ensure I built a happy home but unfortunately she never trusted me enough. I wandered for months trying to get her back and sought help from various sources including her family intervention but never yielded success. I came in contact with Dr Mahlangu who I doubted at the earlier stage when i got in contact with. I had to keep hope alive and complied with the procedures just the way he explained everything to me. He assured me of her return which happened after two to 24 hours and i am yet to find words to express how happy and appreciative i am, knowing my son and I had his mom back home to us. I am telling everyone about Dr MAHLANGU and his kind heart helping people. Call / whats app +27787390989 Email; drmahlanguhome@gmail.com website :https://www.drmahlangu-home.com/ drmahlanguhome@gmail.com
jamesbenson8095
Jan 21, 2023Thank you HACK VANISH THE CREDIT SPECIALIST. A few weeks ago I reached out to them to explain my credit situation, and they requested my info and necessary details and were able to get every derogatory item on my report erased and increased my FICO score to 788 within 6 days, I was amazed at their brilliancy. They are fast and reliable. Anyone looking for a credit solution below is their contact details: Email: HACKVANISH @ GMAIL. COM Text/ Call/ WhatsApp No. +1(209) 330-3047
Flora Flow
Jan 22, 2023i read some testimony about Priest Salami on how he has helped people in bringing back there ex within 48hours i was just thinking if that was real, And decided to call a lady who made a testimony and also dropped her number, So i called her and ask her about Priest Salami she said Priest Salami is a trustworthy man and he is ready to bring back my lover for me, i was just so happy and a little bit relief that my lover will be back to me soon, Then i decided in contacting Priest Salami which i did, And before i could share him my problem he has already told me what i came for, And he said everything will be okay within 24hours that my lover will be back to my arms, So he said he would be casting the spell and that within 24hours my lover would call me, So i hoped so truly before the 24hours i got a call from a man who has left me for the past 1years saying he is sorry and he wants me back, i was happy and i said i also want him back, Then i traveled to Canada to meet him up, And he apologized for what he has done to me now he proposed to marry me and we are both preparing for our wedding soon, All thanks to the great and World best spell caster, Priest Salami His private mail : purenaturalhealer@gmail.com WhatsApp him directly :+2348143757229 https://www.facebook.com/profile.php?id=100086517444734
dolliehash65
Jan 23, 2023Hi everyone, I was sad for so long when my husband left me. I searched for a lot of psychics who would help me but they all turned me down because I didn’t have enough. Dr Raypower had compassion and helped me and I am happy again as my husband is back home, cause this man has put in everything he had to help me and I will forever be grateful. I will encourage and recommend anyone to contact this psychic. He does all kinds of spells aside from love spells. You can reach out to him via WhatsApp +27634918117 or email: urgentspellcast@gmail.com visit his website: http://urgentspellcast.wordpress.com
kaylamarrie200
Jan 27, 2023Hi everyone reading this amazing testimony of mine and i want to give my own verdict on how you can win the lottery by contacting Dr Kumar for your lottery numbers. I started playing lottery games for years now and I have never won big. I went online to seek help to see if i could get some tips on how I can win bigger amounts on the lottery and I saw some nice reviews about Dr Kumar who has made different people huge winners in the lottery by sending them lottery numbers. I gave it a try and I contacted Dr Kumar by email and he told me how and what to do before I can become a big lotto winner and I accepted. He made special prayers for me at his temple and sent me the required lottery numbers to play and when I played it, I won a massive $235.4 million POWERBALL jackpot. I was so happy and I chose to receive my winnings in a one-time, lump-sum payment of $160,038,447.27 at Florida Lottery Headquarters in Tallahassee and the balance was given to the store that I bought & played the game from. I would love other people who want to win the lottery to seek help from Dr Kumar and he will also send you the lottery numbers and make you a winner just like me. You can reach Dr Kumar on email: spellcasttemple@gmail.com or WhatsApp +2347051705853
cindybyrd547
Jan 28, 2023A real spell caster helped me change my husband heart to love and want me again. I'm Josie Wilson from USA. I was at the verge of losing my marriage when Dr.Excellent stepped in and rescued me. My husband had filed for divorce after an unending dispute and emotional abuses we both suffered due to misunderstandings. He left the house and refused to come back. I sought for Dr.Excellent knowing I don’t wish to suffer another penury due to divorce cases and losing my man. I complied with his work procedures which was very easy and he worked for me. The love and connection between me and my partner was restored and he came back and got the divorce case canceled. It’s all for a fact that Dr.Excellent is honest and transparent in helping people and you too reading this can get the solution you seek in restoring joy and happiness in your marriage or relationship. contact Dr.Excellent for help now..Here his contact. WhatsApp: +2348084273514 ,Email: Excellentspellcaster@gmail.com Website:https://drexcellentspellcaster.godaddysites.com
deweymichael28
Jan 28, 2023After going through car repossession and foreclosure in 2020, my credit score dropped to Equifax: 509, TransUnion: 501. All attempts to get my credit back to a good rating didn’t yield positive results. Just last month while I was browsing a credit blog, I came across a comment by Laura on how she got her credit fixed by PINNACLE CREDIT SPECIALIST. Immediately, I reached out to PINNACLE CREDIT SPECIALIST and asked if he could help fix my credit score too. He responded positively and I had to subscribe to his services. On checking my credit report after 6 days, my score had skyrocketed to Equifax: 806, TransUnion: 811. I also noticed that the car repossession, foreclosure, hard inquiries, and late payments on my credit report have been removed. What an awesome service! Here’s his contact info if you need his services; EMAIL: PINNACLECREDITSPECIALIST@GMAIL.COM / (480) 420-8331.