Price Elasticity of Demand

Price elasticity of Demand measures how responsive Demand when price is varied.

\( PED = \frac{\%\Delta QD}{\%\Delta P} \)

PED is almost always negative, since for most goods, price and demand are inversely proportional. (If something costs more, then you buy less.).

Sometimes we drop the minus sign, since its usually obvious anyway.

Factors that affect PED

• Necessity or Luxury
• Percentage of Income
• Width of market - How many substitutes
• Time (over a long time, people will be more able to switch products)

Examples of Elastic PED goods

• Luxury brands / handbags
• Restaurants
• Netflix / Disney+

Examples of Inelastic PED goods

• Houses
• Bread / milk
• Fuel

Perfectly Inelastic Demand

The more inelastic a good is, the more it looks like an 'I' / the more vertical it is. Perfectly inelastic demand means that consumers will always a fixed quantity, regardless of price / supply.

Perfectly Elastic Demand

The more elastic a good is, the more flat it is. Elastic goods are very responsive to changes in price. Perfectly elastic means below the demand curve everything is purchased immediately, and above nothing will be purchased. An example of a perfectly elastic demand curve is commodities / wheat (before regulations). The demand is perfectly elastic, at the market price. Anything above the market price won't be purchased because there are so many other sellers selling at market price.