• Category
  • >Financial Analytics

5 Factors Affecting the Price Elasticity of Demand (PED)

  • Ritesh Pathak
  • Jan 12, 2021
  • Updated on: Nov 21, 2023
5 Factors Affecting the Price Elasticity of Demand (PED) title banner

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.

 


The price-demand curve for elastic demand is a vertical line with a negative slope.

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


The image contains the PED formula i.e. Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price.

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.

Latest Comments

  • richardmorin461babb0c03826f498d

    Mar 12, 2024

    Today I called PINNACLE CREDIT SPECIALIST and asked to have my BK7 removed from my CR, and they did. It was scheduled to fall off next year. So that’s that. A horrible chapter in my life but I’ve come out on top. So much wiser, better prepared for the future, and peace of mind where finances are concerned. Thanks to this forum and the good folks that spend their time here to share their experience and share the knowledge they got from PINNACLE CREDIT SPECIALIST. Thank you PINNACLE CREDIT SPECIALIST for all your assistance, guidance and cheerleading. Especially in the early days of my rebuild. With my scores now in the 800’s I’m tempted to app just to know I’d likely be approved, but there’s nothing I need right now. A sincere thanks to all of you! Contact them by email: PINNACLECREDITSPECIALIST@GMAIL.COM / Or call +1 (409) 231-0041.

  • jasonherman4787bb771ddefc64bc2

    Mar 13, 2024

    Hi everyone, I want to sincerely appreciate PINNACLE CREDIT SPECIALIST for the dedication and time they put in working my credit. I had 4 charges off accounts (3 cc and 1 installment loan). I do have 2 cards with longevity and bad payment history though lower limits ($1200 and $850) and a car loan with 7 late time payments reflecting. During my financial struggles NFC closed the 2-credit card accounts I had with them. I also had a chapter 7 BK in 2020. I did have high utilization and few late payments (over more than 10 days late). The account closure dropped my scores because the balances took my utilization to 990%. I continued making payments on time until a friend read about PINNACLE CREDIT SPECIALIST on Quora and informed me, I contacted them after reading some testimonies about them, they ran my credit report, analyzed my credit score and determined which action will have the greatest impact. They raised my credit score to 803 and deleted all negative items on my credit report including the chapter 7 BK, within 6 days. They made it work and I have a clean profile now. My heart is full of gratitude. You can reach them via: PINNACLECREDITSPECIALIST@GMAIL.COM Or call +1 (409) 231-0041.

  • jamesgrove20939e280fc27134a88

    Mar 19, 2024

    I had a couple of things happen in 2021 that caused me to get extremely behind on several bills. I had about 3 credit cards end up in charge-off status. Only one of those cards was ever sent to collections and I have since paid this before the collection ever hit my credit. 2 of the cards were through Capital One. 1 of the 2 were sent to collections. The unpaid one has been referred to an attorney and kept in house, although I received documentation that the attorney was dropping the lawsuit against me. My credit was hovering at around a 620 Equifax FICO and a 618 Experian FICO. I had so many lates from these three accounts. This forum gave me some hope regarding PINNACLE CREDIT SPECIALIST. PINNACLE CREDIT SPECIALIST came through for me and increased my scores to 801 Equifax, 806 TransUnion and 811 Experian and deleted all the negative items on my credit profile including charge offs and collection. If you need a hacker to fix your credit issues within 6 days, PINNACLE CREDIT SPECIALIST is good to go. They get the job done as quickly as possible. Email: PINNACLECREDITSPECIALIST@GMAIL.COM / +1 (409) 231-0041.

  • Susan Bickford

    Mar 23, 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

  • Susan Bickford

    Mar 23, 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

  • arungupta16576c733168b08642b0

    Mar 29, 2024

    The lots of debt on my credit report deprived me so some many opportunities. Long story short I had 14k in CC debt, 30k in student loan debt, not great. I was low income/living beyond means while younger, perfect payment history last 7 years, no delinquency, charge offs, bankruptcy etc., no negatives other than balances, I think. Fico 8 was high 500s (599 EQ, 595 TU, 590 EX). After my mum told me about PINNACLE CREDIT SPECIALIST, I reached out to them immediately with the proposal, after about 6 days I was sitting here Netflix and chill when I get a notification from PINNACLE CREDIT SPECIALIST to pull my report. Yes, my scores are now (801 EQ, 809 TU, 811 EX) I shed in tears the goal was to be among the 800s club before the end of the year which has been achieved. You can contact him via: PINNACLECREDITSPECIALIST@GMAIL.COM Or Text +1 (409) 231-0041.

  • josephmurray9086eda1a5dafdb64f0a

    Apr 01, 2024

    I intend to propose to my long-time girlfriend later this summer, so that we can move to Las Vegas together by the end of December. After that, we needed urgent help fixing our credit. I had a car loan, student loans and credit card debt. I also had another debt (mortgage). My girlfriend had 93k in consumer debt, with 75k of it on credit cards and the rest on her Acura. She does well in her career (makes $120k/yr. gross) which she has a spending issue. Well, I sought help online and I read quite a lot of good reviews about a credit guy called PINNACLE CREDIT SPECIALIST. I contacted him for credit help. We got started and after a couple of days, PINNACLE CREDIT SPECIALIST cleared the debts on my credit profile and eventually raised my score to 811. All these miracles happened in March. Feel free to contact him by email: PINNACLECREDITSPECIALIST@GMAIL.COM Or phone +1 (409) 231-0041 for credit related issues.

  • scottfeifer7d3d8bfd1061b4ac1

    Apr 07, 2024

    I’m writing this review in appreciation to this great credit specialist called PINNACLE CREDIT SPECIALIST. I can’t stop thanking them for the good job they did on my credit. I had been suffering from financial bondage until I met a PINNACLE CREDIT SPECIALIST. They promised to turn my situation around and they kept their promise. Every negative item on my credit report (hard inquiries, late payments, credit card debts and charge-off etc.) has been cleared and my credit score raised by 279 points within 6 days. Contact info Email: PINNACLECREDITSPECIALIST@GMAIL.COM Telephone: +1 (409) 231-0041.

  • Susan Bickford

    Apr 10, 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

  • petermoseley8d80beb73ae514962

    Apr 13, 2024

    Have you guys ever checked out PINNACLE CREDIT SPECIALIST? I’m knocking on my 30s doors (29y/o). I was obviously careless and irresponsible in my 20s but wanted to turn my ship around before my 30s. I had a credit score of 580 (Equifax), 527 (Experian), 503 (TransUnion). $2.2K in credit debt with a limit of $2.9, so high utilization, 3 cards in collections. Well, I also had about 14 closed accounts 4 of which have been paid off but still were still on my report. I do have an auto loan and student loan. Luckily for me a friend introduced me to PINNACLE CREDIT SPECIALIST, he helped me raise my score by 231 points and marked all debts as paid on time, he also deleted all collections from my credit report thereby giving me a new slate within a few weeks. Contact him directly by email: PINNACLECREDITSPECIALIST@GMAIL.COM Or Call +1 (409) 231-0041.