Lecture on Price Elasticity of Demand (PED)

Basic Law of Demand

• Law of Demand:
  • Price increase leads to quantity demanded decrease.
  • Price decrease leads to quantity demanded increase.

Price Elasticity of Demand (PED)

• Definition: Measures responsiveness of quantity demanded to a change in price.
• Equation:
  • PED = (% Change in Quantity Demanded) / (% Change in Price)
  • Remember: "Queue before you Pee" (Quantity before Price)

Calculating Percentage Changes

• Formula:
  • Difference between two numbers divided by the original number, multiplied by 100.
• Final PED number is typically negative due to the inverse relationship in the law of demand. Ignore the negative sign for interpretation purposes.

Interpreting PED Values

• PED > 1: Demand is Price Elastic
  • Quantity demanded changes more than the price change.
• PED < 1: Demand is Price Inelastic
  • Quantity demanded changes less than the price change.
• PED = 0: Perfectly Price Inelastic
  • Quantity demanded does not change with price.
• PED = ∞: Perfectly Price Elastic
• PED = 1: Unit Price Elastic

Examples

1. Cigarettes Price Increase:
   • Price increases from £4 to £5 (25% increase).
   • Quantity demanded decreases from 150 to 135 (10% decrease).
   • PED = -0.4, indicating price inelastic demand.
2. Sofa Price Decrease:
   • Price decreases from £1,000 to £800 (20% decrease).
   • Quantity demanded increases from 2,000 to 3,800 (90% increase).
   • PED = -4.5, indicating price elastic demand.

Drawing Demand Curves

• Price Inelastic Demand: Steep demand curve.
• Price Elastic Demand: Shallow demand curve.
• Perfectly Price Inelastic: Vertical line.
• Perfectly Price Elastic: Horizontal line.

Factors Affecting Price Elasticity of Demand (SPLAT)

• Substitutes:
  • More substitutes lead to more price elastic demand.
  • Few substitutes lead to price inelastic demand (e.g., commodities like coffee, oil).
• Percentage of Income:
  • Higher income percentage taken by a price change leads to more price elastic demand.
  • Lower income percentage leads to price inelastic demand.
• Luxuries vs. Necessities:
  • Luxuries: More price elastic.
  • Necessities: More price inelastic.
• Addictiveness:
  • Addictive goods tend to be price inelastic (e.g., cigarettes, alcohol).
• Time Period:
  • Short run: More price inelastic.
  • Long run: More price elastic as substitutes become available.

Stay tuned for the next lecture on the link between PED and total revenue, crucial for businesses.