Understanding Price Elasticity of Demand (PED) and Income Elasticity of Demand (YED) is vital for businesses and policymakers. PED measures how demand varies with price changes, while YED assesses demand sensitivity to income shifts. These concepts help predict consumer reactions to pricing strategies and economic conditions, influencing marketing and product positioning.
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Price Elasticity of Demand is a measure of the sensitivity of the quantity demanded of a good or service to changes in its price
Formula for calculating Price Elasticity of Demand
Price Elasticity of Demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price, using the formula PED = (% Change in Quantity Demanded) / (% Change in Price)
A PED value greater than 1 signifies elastic demand, less than 1 indicates inelastic demand, and a value of exactly 1 denotes unitary elasticity
Income Elasticity of Demand measures the responsiveness of the quantity demanded of a good or service to changes in consumer income
Formula for calculating Income Elasticity of Demand
Income Elasticity of Demand is determined by dividing the percentage change in quantity demanded by the percentage change in consumer income, using the formula YED = (% Change in Quantity Demanded) / (% Change in Income)
A YED value greater than 1 suggests a luxury good, between 0 and 1 indicates a normal good with income inelastic demand, and a negative value indicates an inferior good
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Define PED
PED measures how quantity demanded of a good responds to its price changes.
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Characteristics of inelastic demand
Inelastic demand means demand is stable despite price changes, common for necessities.
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Role of PED for businesses/policymakers
PED helps predict consumer response to price changes, guiding pricing strategies and policies.
