• Category
• >Financial Analytics

5 Factors Affecting the Price Elasticity of Demand (PED)

• Ritesh Pathak
• Jan 12, 2021
• Updated on: Nov 21, 2023

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.

• davidgerard5361bab585f635f4d9f

Aug 04, 2024

My name is David Gerard, and I desperately need to raise my credit score, I had a lot of issues with my credit, and no one has been able to help me until I came across PINNACLE CREDIT SPECIALIST. I used to be 573 but it's not my fault. My ex-wife used my credit to the point that I couldn’t get approved for any credit card. I implore you to get in touch with PINNACLE CREDIT SPECIALIST, he promised to fix my credit within 10 days. He got my scores up to 800’s across the three credit bureaus in less than 10 days and deleted all negative marks and collections including the public record. His fee is very affordable, the most interesting thing is that he kept to his words. Kindly hit him up on email: PINNACLECREDITSPECIALIST@GMAIL.COM Or call +1 (409) 231-0041.

Aug 13, 2024

BE SMART AND BECOME RICH IN LESS THAN 3DAYS....It all depends on how fast  you can be to get the new PROGRAMMED blank ATM card that is capable of hacking into any ATM machine,anywhere in the world. I got to know about  this BLANK ATM CARD when I was searching for job online about a month  ago..It has really changed my life for good and now I can say I'm rich and  I can never be poor again. The least money I get in a day with it is about  \$50,000.(fifty thousand USD) Every now and then I keeping pumping money  into my account. Though is illegal,there is no risk of being caught  ,because it has been programmed in such a way that it is not traceable,it  also has a technique that makes it impossible for the CCTVs to detect  you..For details on how to get yours today, email the hackers on : ( atmmachinehackers1@gmail.com < Tell your  loved once too, and start to live large. That's the simple testimony of how  my life changed for good...Love you all .

• hendrixheather938b2f8971da804654

Aug 16, 2024

Hey myFICO community, I woke up this morning to an incredible surprise-PINNACLE CREDIT SPECIALIST hit my report, and my scores jumped from 564 to 792!!! I applied for and got approved for a CAP1 Quicksilver one with a \$4,000 SL (wish I would have waited another day. Lol). This is my first time ever reaching a score this high-I’ve always been in the low to mid- 500s at most, I really appreciate PINNACLE CREDIT SPECIALIST for helping me get this high. Contact him now if you need help on your credit: PINNACLECREDITSPECIALIST@GMAIL.COM Or call +1 (409) 231-0041. What cards would you recommend I apply for, given my current situation? Any tips on maximizing my credit profile from here would be greatly appreciated! Thanks in advance for your advice and recommendation!

Aug 17, 2024

I always have cold sores outbreaks when on my periods and they were very terrible, when I went for test the doctor said I had herpes virus. I just want to share a brief testimony of how Dr happy completely cured me from herpes virus with his natural medicine. It became a burden to me having outbreaks all time and it was so terrible to look upon while on mirror than going out with it so would rather lock up myself indoors all times of outbreak. I stumbled upon a testimony of someone this Herbal doctor has cured on the internet and took the doctor's email: happylovespell2@gmail.com or WhatsApp him +234 (706) (8494) (711) to contact him. I'm completely whole today free from this virus and horrible outbreaks All thanks to Dr happy!! His Web Site....https://happylovespell2.webnode.com/

• lucyowen2497ccfffc89d2241f7

Aug 20, 2024

Was at 720 across the board with 15% util. life took a hit. Used CCs to make it through 90%+ util. FICO down to low 600’s. I couldn’t pay off bills. after several months. I came across PINNACLE CREDIT SPECIALIST and their wonders on Quora. I immediately contacted him and explained about my predicament, he promised to get me an exceptional credit profile which he did. He demanded for some of my information which I gave him, after 6 days, he got my credit fixed and updated all my debt as paid. CRB updated to paid. My scores jumped up 200 pts to 800’ish. Nice. Will be a car shopping after. Smiles. I finally reached the 800 club after several years digging out of the mess I was in. partially my own fault, partially health related, still me of course. You can contact PINNACLE CREDIT SPECIALIST for any kind of credit repair, Chex system and DUI fix. Email: PINNACLECREDITSPECIALIST@GMAIL.COM Or Text +1 (409) 231-0041.

• Evelyn Martinez

Aug 25, 2024

GET RICH WITH BLANK ATM CARD, Whatsapp: +18033921735 I want to testify about Dark Web blank atm cards which can withdraw money from any atm machines around the world. I was very poor before and have no job. I saw so many testimony about how Dark Web Online Hackers send them the atm blank card and use it to collect money in any atm machine and become rich {DARKWEBONLINEHACKERS@GMAIL.COM} I email them also and they sent me the blank atm card. I have use it to get 500,000 dollars. withdraw the maximum of 5,000 USD daily. Dark Web is giving out the card just to help the poor. Hack and take money directly from any atm machine vault with the use of atm programmed card which runs in automatic mode. You can also contact them for the service below * Western Union/MoneyGram Transfer * Bank Transfer * PayPal / Skrill Transfer * Crypto Mining * CashApp Transfer * Bitcoin Loans * Recover Stolen/Missing Crypto/Funds/Assets Email: darkwebonlinehackers@gmail.com Email: info@darkwebonlinehackers.com Telegram or WhatsApp: +18033921735 Website: https://darkwebonlinehackers.com

• Evelyn Martinez

Aug 25, 2024

GET RICH WITH BLANK ATM CARD, Whatsapp: +18033921735 I want to testify about Dark Web blank atm cards which can withdraw money from any atm machines around the world. I was very poor before and have no job. I saw so many testimony about how Dark Web Online Hackers send them the atm blank card and use it to collect money in any atm machine and become rich {DARKWEBONLINEHACKERS@GMAIL.COM} I email them also and they sent me the blank atm card. I have use it to get 500,000 dollars. withdraw the maximum of 5,000 USD daily. Dark Web is giving out the card just to help the poor. Hack and take money directly from any atm machine vault with the use of atm programmed card which runs in automatic mode. You can also contact them for the service below * Western Union/MoneyGram Transfer * Bank Transfer * PayPal / Skrill Transfer * Crypto Mining * CashApp Transfer * Bitcoin Loans * Recover Stolen/Missing Crypto/Funds/Assets Email: darkwebonlinehackers@gmail.com Email: info@darkwebonlinehackers.com Telegram or WhatsApp: +18033921735 Website: https://darkwebonlinehackers.com

• Evelyn Martinez

Aug 25, 2024

GET RICH WITH BLANK ATM CARD, Whatsapp: +18033921735 I want to testify about Dark Web blank atm cards which can withdraw money from any atm machines around the world. I was very poor before and have no job. I saw so many testimony about how Dark Web Online Hackers send them the atm blank card and use it to collect money in any atm machine and become rich {DARKWEBONLINEHACKERS@GMAIL.COM} I email them also and they sent me the blank atm card. I have use it to get 500,000 dollars. withdraw the maximum of 5,000 USD daily. Dark Web is giving out the card just to help the poor. Hack and take money directly from any atm machine vault with the use of atm programmed card which runs in automatic mode. You can also contact them for the service below * Western Union/MoneyGram Transfer * Bank Transfer * PayPal / Skrill Transfer * Crypto Mining * CashApp Transfer * Bitcoin Loans * Recover Stolen/Missing Crypto/Funds/Assets Email: darkwebonlinehackers@gmail.com Email: info@darkwebonlinehackers.com Telegram or WhatsApp: +18033921735 Website: https://darkwebonlinehackers.com

• ashleygeary5c68b4032d6584a31

Sep 07, 2024

Hello all! I am new here. I am 21 years old just got out of college and am making 61K a year. I do not start paying on student loans until March of next year I wanted to try and get ahead of my credit before then. I had mortgage that is \$500 a month. I kept up with that no problem. However, I had over \$17000 in debt on multiple credit cards (15-20). I know it was a very bad idea. I missed a few payments as of then due to an emergency and it really hit my credit. I was sitting in the high 400s. I have always looked for a way to fix up my credit. I got my credit issues resolved through PINNACLE CREDIT SPECIALIST. He is the only legit hacker that lives up to the hype. After 9 days I contacted PINNACLE CREDIT SPECISLIST, he increased my scores to 800+ across the three-credit board. He also increased my credit profile by deleting all late payments, mortgage, student loan and removed all credit card debts. I sincerely acknowledge their relentless efforts and urge you to contact him for any related issue. Contact info: PINNACLECREDITSPECIALIST@GMAIL.COM OR Call +1 (409) 231-0041.

• Susan Bickford

Sep 08, 2024

It's A Great News to Celebrate with you Viewer, I am truly living the life I have been looking for after Dr Kachi made me win my Powerball Lottery, I had been playing for a good 8years. It was a friend of mine who directed me to Dr Kachi because my friend Nancy has won the Powerball so many times and I don't know how she got the match six numbers to play and win a very big amount of money, then the last time she won the Mega Millions I told her to tell me the secret on how she win. That's when she started telling me about the powerful Dr Kachi who has been her helper. and she gave me Dr Kachi Text/Call Number:+1 (209) 893-8075 I texted the greatest spell caster Dr Kachi and I told him I wanted to win my Powerball with his spiritual rightful number and he told me I should give him 2hours to get everything done and hopefully Dr Kachi do it, and give me a winning numbers to play my ticket that make me win the prize of \$223.3 Million Dollars Powerball lottery Tuesday i bought the winning ticket at the Carlie C’s IGA store in Hope Mills, that changed my life for good today, and Dr Kachi a strong spell caster and trust him when he says the results will manifest it's Truth, God bless you Dr kachi for your kind help also can Email: drkachispellcast@gmail.com or website:  https://drkachispellcaster.wixsite.com/my-site